Opinion: Vickers report on banking does not go far enough

Naomi Smith and Prateek Buch of the Social Liberal Forum write about the Vickers Commission on Banking…

At Lib Dem Spring conference in Sheffield last month, delegates overwhelmingly supported the Social Liberal Forum (SLF) motion Tougher Action on Banks and Bonuses. The interim report published recently by the Vickers Commission on Banking went some way to addressing the problems within the industry , but as we predicted in our speeches to the SLF motion, falls far short of Liberal Democrat policy which calls for:

  • A break up of banks deemed ‘too big to fail’ into smaller, safer entities
  • Greater transparency on pay, with top earnings to be fully disclosed in all state owned banks
  • A split of high-risk banking away from ordinary high-street banking, with no State guarantee for the former
  • Greater support of local credit unions and mutuals
  • Measures to be taken to tackle financial exclusion for the vulnerable

There is much to commend in the Interim report, not least its direction of travel; it represents the first attempt to rein in the power wielded by inadequately regulated banks, and makes some welcome recommendations that should increase competition in the retail banking sector.

The report is, however, silent on many of the pressing issues, and is thereby in keeping with other recent, official and so-called “independent” reports (e.g., the Walker Report on Corporate Governance, and the Davies Report on Gender Equality) – sadly, it’s a rather tame affair. Mainstream commentary suggests that the proposed reforms don’t go nearly far enough; indeed the banks’ relief at being let off the hook was instantly reflected in the rise of bank shares on the stock market.

The refusal to recommend the break-up of the banks and divorce the retailing side from the “casino” investment side is a cop-out. Vickers instead proposes that “Fire Walls” be created to divide the two activities within each bank. This is as unconvincing as what used to be termed “Chinese Walls” that were meant to safeguard against internal conflicts of interest in financial institutions and audit firms. But who is going to robustly police and regulate these “walls”? Vickers offers no advice on this crucial aspect of its main recommendation, and the evidence from recent years suggests that leaving such regulation to the industry would be ineffective.

Furthermore the Vickers report has nothing to say on ballooning executive pay and bonuses which through perverse incentives were largely responsible for the malaise at the heart of the system. This isn’t just a ‘bash-the-bankers’ viewpoint; a report by Ernst and Young for the banking lobbyists the Institute for International Finance suggests that top bankers’ pay remains largely unreformed, as does the risk culture in such organisations.

The Interim proposals are to go out for consultation over the next six months after which the Final Report will be produced. That’s gives the British Bankers’ Association even more time to lobby to have these initial proposals watered down still further, and makes it all the more important that Liberal Democrats take a firm lead in instituting the party’s policy.

The banking industry wants nothing more than to restore as much of the pre 2007-crash status quo as possible. The Coalition government, via Vickers, should require the banks to come up with positive and robust proposals that would minimise the risk of taxpayers having to fork out if/when the next crisis occurs.

In the run-up to the publication of the Interim Report, press reports indicated that the Government would take a tough stance towards the banks. After its publication, it appears that within the Coalition there is now a growing consensus to accept the Vickers’ proposals – in so far as they go these proposals are a good first step, but Government policy needs to go further. This makes it crucial that before the Vickers Commission’s final report is published, Liberal Democrats in government work hard to implement the radical but necessary proposals set out at Conference and restore banking to its rightful place in the economy – as a safe servant of a vibrant economy, not as a powerhouse that continues to nationalise risk and privatise profit.

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6 Comments

  • Andrew Suffield 18th Apr '11 - 11:16pm

    The refusal to recommend the break-up of the banks and divorce the retailing side from the “casino” investment side is a cop-out.

    I haven’t got around to reading the Vickers report yet, but all the others I’ve seen have claimed that for the “usual suspects” here, it’s the investment side which is currently propping up the retailing side, and splitting them would mean the retailing side required another bailout…

    Splitting just doesn’t look like the answer. At least not until the banks have recovered enough to survive a split.

  • Not only should retail banking be separated from Investment banking, Investment bankers should not be allowed to make money from trading its own money if it holds retail investors money. By this I mean if it controls peoples pensions and ISA investments it’s not right that they trade their own money often against the investments it is holding on other peoples behalf.
    I have often wondered how come the stock markets are crashing most pension funds are through the floor but Investment banks are sharing out billions in bonuses. Then I suddenly realized basically they can easily invest their money and make a profit from the fall in the value of their customers investments.
    As an example pension fund x holds a large chunk of BP but it is decided to switch this to shell if I new this in advance it would be easy to make money from that knowledge yes pension fund x may pay a little more for the shell shares and get a little less for the BP shares But that only confirms what a good decision it was to change over the investment.
    BAN Investment banks from investing any of the banks money ever. If it works for customers then any profit or loss is the customers the bank should make it’s money from the fee’s only.
    Peter

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