Did Sir John Vickers’ Independent Banking Commission go far enough?

This morning I was listening to Nicky Campbell’s phone-in programme on BBC Radio 5 Live. The topic was the final proposals of Sir John Vickers’ Independent Banking Commission for reforming the UK’s banking system, which were published this morning.

To many, including Philip Augar (who since leaving the City in 2000 has done much to expose the destructive ways in which British finance works, and was a guest on Nicky Campbell’s show), Vickers’ proposed reforms— which include ring-fencing banks’ retail arms, forcing banks to plump up their capital cushions and the introduction of greater competition into the sector— are an elegant solution to an intractable problem.

Their hope is that the proposed reforms, which Vickers — an economics professor, former chief economist at the Bank of England and former chairman of the Office of Fair Trading — told us this morning don’t have to be fully implemented until 2019, will in the long-term make Britain’s banks safer, less likely to have to rely on government bailouts, and more predisposed to serve society and the wider economy.

I agree with a lot of what Augar says, but I fear he may be wrong about Vickers. The reforms are intended to ‘render safe’ a toxic sector from which the former Labour government unwisely removed many of the checks and balances in 1997-2007 and which, perhaps unsurprisingly, went on to bring the UK economy to its knees.

Since then, the banking sector has displayed minimal contrition for the damage it has wrought on the economy, and minimal gratitude for the immense  support taxpayers have given it. It has continued to exploit a near-oligopoly, to “rent gouge” on the UK economy, and has in recent weeks been issuing far-fetched warnings that even modest attempts at reform are going to lead to economic Armageddon.

One caller to Nicky’s programme, Tony, referred to the 12-year-old boy who recently received a nine-month supervision order and who’s mother fined £50 fine after he stole a £7.49 bottle of wine from Sainsbury’s during last month’s riots. Manchester City Council has said that his entire family now faces eviction.

Tony argued that there is a mismatch. Draconian punishment has been meted out to this boy and his entire family for what might be considered a relatively minor theft. Yet the people who, as a result of their own lack of probity, which in some cases extended to criminality, caused the banking crisis have, for the most part, walked away from the wreckage they created Scot-free and with their financial fortunes unaffected.

Another of Campbell’s guests, Andew Lilico, an economist who blogs for the Daily Telegraph, responded by saying he does not believe fraud was a major cause of the banking collapse. I would dispute this.

Having studied the evidence (including the criminal actions being pursued against RBS, HSBC and Barclays by the United States government agency Federal Housing Finance Agency for, allegedly, misrepresenting the quality of residential mortgage-backed securities (RMBS) in the US market) and having studied the report that came out of an investigation done by the US Senate’s Permanent Subcommittee on Investigations (“Wall Street and the Financial Crisis: Anatomy of a Financial Collapse”) it’s clear that fraud was a major contributor to the financial crisis. And this was the case on both sides of the Atlantic.

There’s also the HBOS Reading scandal, which I’ve been writing about for three years now. This is widely considered to be the tip of an iceberg of fraud and malfeasance at the former Halifax Bank of Scotland which Lloyds chief executive António Horta-Osório seems just as determined than his predecessor Eric Daniels to cover up (here’s how one of the many victims of that fraud feels about Vickers‘ final report).

However none of this got much attention in the report. Nowhere in the 146,000-word, 358-page document, does the ICB even use the words “ethics” or “ethical”.

Nor do “morality” or “integrity” feature (unless they’re associated with the concept of “moral hazard” or to mean “completeness”.) Yet, in the absence of any mention of these things, isn’t it going to be impossible to build a healthier and enduring banking system?

Maybe the ICB believes that, by preventing banks from gambling depositors’ money on so-called “casino” activities, and by preventing them from abusing the implicit state guarantee to sustain their investment banking arms, the temptation to misbehave will somehow be lessened or removed. If this is the case, I think the commission is being naive.

Another caller to Nicky Campbell’s programme said it’s high time that British politicians developed some “cojones” and stopped cosying up to the banking sector — as they traditionally do at annual shindigs such as the white-tie Mansion House dinner. (Famously, it was at this particular extravaganza that ex-chancellor Gordon Brown in June 2006 told bankers he did not favour a regulatory crackdown on their sector in the wake of scandals like WorldCom, adding “we were right to build upon our light touch system … fair, proportionate and increasingly risk-based”.)

(It was at the same event in June this year that current chancellor George Osborne told the banking fraternity he was going to implement the Vickers’ reforms, three months before the final report was even published!)

I intend to write a more detailed appraisal of Vickers’ proposals, including looking at whether the commission should have gone further, examining whether the fact reforms don’t have to be implemented until 2019 give banks scope to quibble over the details and get harsher aspects kicked into the long grass, and whether its conclusions are worthless since its report is based on a fairy tale story about banking, in a subsequent article or blog.

In the meantime, however, here’s what the Daily Telegraph’s economics editor Philip Aldrick had to say this morning. In an article focused on the true costs of the implicit government guarantee, which Barclays erroneously claims costs taxpayers nothing, Aldrick wrote: “The ICB is right, and Barclays is being utterly disingenuous when it says taxpayers spend no money as a result of the implicit guarantee. The facts speak for themselves. The benefits of reform far outweigh the costs.”

Update 1: 5.45pm, 12 Sept

Since writing this blog I have read Alex Brummer’s column, in which he lists five reasons why he believes the process was flawed, not least because the Independent Banking Commission owed it origins to political expediency rather than a deep-seated desire to create a sustainable financial system. I wholeheartedly agree with most of what Alex says here.

Update 2: 7.20pm, 12 Sept

Here’s some interesting commentary from Compass and the New Economics Foundation, both of which are critical of Vickers. “Instead of recommending the simple and effective step of complete bank separation the British establishment has bottled it and the City has won again,” says Neal Lawson, chair of Compass.

Update 3: 12.30am, 13 Sept

Just found three excellent articles about Vickers

• Philip Stephens in the FT Vickers hands victory to the bankers’ shop steward
• Steve Richards in the Independent Bankers are the unions of our time
• Peter Jones in The Scotsman Three cheers for taking the long view

This blog post was published on 12 September 2011