Interim findings from my Really Independent Commission on banking reform
The Warden of All Souls, Sir John Vickers, has revealed the outlines of what he thinks about banking reform, so perhaps the Warden of Any Other Business — that’s me — should do likewise. Vickers, a former Bank of England economist, is chairman of the Independent Commission on Banking, which will publish interim findings in April and conclusions in September. Its objective is to recommend ways to stabilise the banking system and make it more competitive, while reassuring savers that their money is safe without implicit or explicit government guarantee.
In a speech last weekend, Vickers indicated that he hasn’t ruled out ‘narrow banking’ — the severing of investment banking from the retail branch networks where our savings reside. But close textual analysis suggests he may be keener on ‘ringfencing’: allowing these two forms of business to coexist within the same group, but insisting that the retail side has sufficient capital of its own to protect it from the storms and follies of the investment-bank trading floor.
Anyone who relishes the idea that such worldly deliberations are being conducted by the head of the cloistered 573-year-old ‘College of the Souls of all Faithful People deceased in the University of Oxford’ — where The Da Vinci Code meets Inspector Morse, as it were — will have particularly enjoyed the donnish precision with which Vickers avoided saying anything prematurely precise. He posited ‘a universal bank U’ which has two operations, ‘retail bank R and investment bank I’. A necessary condition for U to fail, he went on, ‘is that R or I fails, but this is not a sufficient condition unless R and I both fail if either does… In shorthand… retail banking is safer with universal banking than with separated banking if and only if the probability that I saves R exceeds the probability that I sinks R.’
Well, yes indeed. But in the meantime, banker-bashing is the new national pastime and Project Merlin, the bankers’ own attempt to ingratiate themselves by acceding at least partially to ministerial demands for bonus restraint and increased business lending, has run into the sand. Serious debate about how best to underpin a financial system that will contribute to stable growth and wider prosperity is in danger of being overwhelmed by unrestrained hostility towards the greedy-bastard City.
Political posturing
So it’s timely to unveil the interim findings of my Really Independent Commission, based on dialogue with Spectator readers on all sides of these arguments. But in trying to emulate the clarity of Vickers’ syllogisms, I admit to finding myself confused. Take business lending, for example. Ministers want more of it. Businesses, particularly small ones, need more of it if they — and the faltering economy as a whole — are to grow their way out of recession. But banks need to rebuild capital after the crash, and the best way to do that is not to lose money on bad loans: so they are picky who they lend to, and they strive to ‘price risk correctly’, which means upping margins and fees.
It’s not pleasant but it’s part of a cycle and it will gradually ease as bank balance sheets strengthen to the point at which bankers feel the urge to pile on new business again. And then, of course, it will swing the other way, with banks offering aggressive terms to persuade customers to borrow more than is wise — and that’s the point at which tougher regulatory intervention really will be justified, to take the heat out of the next boom.
It’s the bonuses, stupid
Finding number one, therefore, is that ‘ministers demand banks lend more now’ is pure political posturing. Both sides know it — and both also know that the real issue is bonuses. But again logic is hard to apply. City pay is a divisive element in national life, far exceeding its trickledown benefit to the economy. But the financial sector provides one fifth of all tax revenues, is widely regarded despite recent mishaps as our most successful industry — and is operating in a global market in which two leading players, Goldman Sachs and Morgan Stanley, have just announced average pay per worldwide employee (right down to the doormen) of £290,000 and £160,000 respectively for 2010.
Our banks genuinely believe they have to compete in this game in order to retain the best profit generators on their staff. But they must also know that if they were to make a sufficient gesture of restraint — a deep cut in this year’s bonus pot, say, plus a slice off top salaries, none of which would leave recipients feeling any the poorer — they would get the politicians off their backs.
And hey presto, Westminster would rapidly lose interest in what the Vickers commission has to say because, again, everyone on both sides knows how damaging it would be to impose uniquely stringent capital rules on British banks alone — and there’s slim chance of getting the G20 to agree a new set of global rules beyond the relatively undemanding ‘Basel III’ regime.
Ringfenced capital requirements, or enforced splitting of the trading ‘casino’ from the retail ‘utility’, might make British banks less likely to fail but would also make them less competitive internationally, less profitable, and less willing to lend. Meanwhile, sensible bankers such as Peter Sands, chief executive of Standard Chartered, have been pointing out that universal banking is uncontroversial elsewhere and works perfectly well in the right management hands. Finally, with memories of the run on Northern Rock and the collapse of RBS still fresh, it may be that no amount of regulation and market restructuring will be sufficient to reassure the public, at least in this generation, that government does not need to stand behind the banking system.
Finding number two, then, is that despite the quality of the Vickers team’s efforts, the bandwagon of banking reform is highly likely to run out of track. But the bankers themselves have the power to stop it, simply by agreeing to pay themselves less.
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