Monday 11 April 2011

Independent Banking Commission interim report

At last we have the considered view of John Vickers and his team on UK Banking; albeit in interim form. Sir John makes a good case for the protection of retail banking in the UK in future.

The implicit suggestion is that by protecting retailers, other parts of banks can fail and the State will not have to offer blanket guarantees. However, the big miss here is the failure to really make clear how the Commission has viewed corporate banking. There is a use of a catch-all term of Investment Banking but this is not the same thing. If a major bank like RBS went down it would also take 28% of all UK corporate loans with it, this wold cause huge issues to the UK economy. The device chosen in the report of simply looking to only guarantee retail deposits does not really do enough to sort out the 'too big' part of the 'too big to fail' question.

For the Government there is much to cheer, criticism of the Lloyds/HBOS merger and a suggestion of further break-up; one in the eye for the former Government. However, the lack of break-up of Investment and other Banking is not much of a success for either George Osborne or Vince Cable.

I see many articles claiming that it was not investment banking that brought down the UK banks; Northern Wreck, HBOS etc. However, RBS, the biggest beast by a long way, was indeed smashed by its GBM arm. There is a strong case for banking to be split into utilities and casino banking; it would require a global level agreement but this should be pursued and not given up on. Alone, the UK is not in the best position to enforce this division as Barclays will go to NY and HSBC to HK.

The final main recommendation is the move to 10% capital retention over the current 7% of Basle III. What this means in that banks will have to hold over 30% more capital on their books in the form of cash equivalents. This will directly translate into lower overall lending; directly against the Government off-stated targets of getting the banks to lend again. Enacting this policy whilst we are not yet out of recessionary times will be madness - typical civil servant gold plating.


Nick Drew said...

I hope - but doubt - that govt has done some bloody good planning, with realistic costs, for seeing banking through the contingency of a double-dip (& who's to say that won't happen?)

then we can form a view on the cost-benefit of having Barclays & HSBC stay or leave: right now, I haven't a clue whether I care or not

(also I have a feeling that some of the supposed alternative locations - NY this means you - won't look so smart if some of the gloomier prognostications actually materialise)

but the immediate issue is catering for Recession(2), if & when it happens, we'll find out soon enough: & for that, we must more-or-less go into battle with what we've got

Anonymous said...

CU From the way you are writing that means if I have read correctly it means going back to the old system where 30% of assets are liquid, just the thing the banks told Gordon Brown said they did not want as it restricted profits and Gordy agreed to, also about the time he sold of a lot of the gold reserves.

Anonymous said...

In the US they have 'control fraud', which is where a bank knowingly makes risky high yield loans, as they can book large profits, even if they don't get paid back, this enables the boss to pay himself a huge bonus. Essentially this is the story of RBS.
Nothing has been done about this, no one has been punished, so I doubt these changes would do much, as this route to riches for the banks board have not been addressed.
O/T does anybody know who is rolling over the bank bonds that were falling due this year, I can't find anything but I presume it is the BoE.

Anonymous said...

You and

seem to be at odds here.

Mark Wadsworth said...

Hang about here, apart from the fact they have misdiagnsed the problem (presumably deliberately*), I though that Basle ratios relate to 'financed by side' and not the 'assets' side.

For sure, assets are risk adjusted first, so holding short term govt bonds is counted as 100% and maybe unsecured loans at 70% or something, so more of the former means you need less share capital and Coco's, but it does not necessarily follow.

* All these problems are down to reckless lending in a land price bubble. NR did not do investment banking or any other such nonsense, it just did good old fashioned 125% mortgages on overvalued houses etc.

Or you could argue that NR had too little share capital to act as buffer for the bond holders, but that's the bond holders' look-out, methinks, seeing as by a roundabout method NR ended up as a debt-for-equity swap (the bad loans and the bonds got parked into the NR 'bad bank').

CityUnslicker said...

Anon - re control fraud - spot on, nothing has been done to address this. The focus on bank behaviour seems to be about what creditors might lose, not about what actions management may take. very good point.

Steven_L said...

I'm with MW, it's quite apparent now that it's the home-owner-ist economies that are screwed and the so called 'global financial crisis' was just a minor blip in the biggest economic boom and rise in living standards since the Industrial Revolution.

Nations with trade surpluses and no house price bubble are doing just fine.

CityUnslicker said...

MW - You are right and it was a simplification I made for the purposes of writing; in the round it is an increase in the need to hold capital against balance sheet, which is mainly loans over deposits but of course the latter do need to be accounted for as well.

by the by NR was a fraud, its just that no one wants to admit it as it causes such a bad smell to all concerned.

Ed Butt said...

The safeguarding of small savers money is welcome. The rest just seems to be tinkering around the edges of the real problem ... which is that we have little real industry any more and the economy for over twenty tears has ben a great big Ponzi scheme.

Anonymous said...

E B more like 30 years, anything that was anything in the word of business and industry has been sold off, very often to foreign companies, they either close or moved lock stock and barrel abroard a lot of much smaller companies scrabbling to gain market share. The Germans seem to have had a totally different approach, they seem to be the EU powerhouse and of course they had to cope with re-uniting the two Germanies modernising the east which cost I believe about 90 Billion. I hope that old one about the last one left switches the light off.

Budgie said...

RBS failed because it was run by a loud-mouth bully who was encouraged by another loud-mouth bully. The Dutch saw Goodwin coming and sold him a shell for lots of moolah, and then just re-started with another version. It was nothing to do with retail mortgages and not much to do with 'investment' banking.

NR, B&B, HBoS did go under because of morgages. But only because our Dear (financial) Leader made the so-called 'independent' MPC follow CPI rather than the housing related RPI. On top of that Gord decimated people's pensions including preventing pension investment being retrospective.

The consequence was a housing boom as people began to regard their house as their pension. That is not the fault of house ownership per se, it was the fault of a crass ego of towering incompetence. A man so truly useless that my grandchildren will still be paying off his debt in 40 years time.

Old BE said...

Blah blah Britain has no industry blah blah boring and utterly incorrect. We have no unionised bureaucratic-managed mass industry employing millions like we did in the good old 1950s and 1960s when a spade was a spade and the British cars and fridges were just top notch. Instead we have lots of thriving small businesses doing all sorts of interesting thing and most importantly where more and more people work for themselves.

Weekend Yachtsman said...

I'll ignore the technicalities and point out two things:

1. No split between retail banking and the casino - the so-called "firewalls" are meaningless gestures.

2. The State guarantee is still in place, so the moral hazard remains.

My conclusions: nothing will change; the whole thing will happen again some time soon. And we'll pay again.

What a wasted chance.

Technology Consultant said...

Indeed failure of RBS was one of the biggest upset in the banking history of UK.