Sunday 20 January 2013

RBS: the faliure of Vickers already evident

6 years from the implementation of the Vickers report and its failings are already clear to see. RBS is about to get a huge fine for Libor rigging, as is par for the course for seemingly every bank that had a trading division in the City.

RBS though are using this as yet another chance to re-structure what is left of the investment banking division. The CEO is going to go and maybe one of the deputies too. The remnants of the investment banking division are going ot be split into a pure trading desk for Bonds and Derivatives and a Debt Capital Markets business that will support its more corporate businesses.

Apparently the FSA and some of its own directors think there is still room for considerable reduction in the Investment Banking scale of the bank. There is nothing wrong with this idea per se, but what exactly is this doing to drive shareholder return? It is keeping the regulators happy, but the GBM division has made £10 billion in profits since 2008. Not any more, as the business is radically scaled back.

What has this to do with the Vickers Report? Well the guidance form the report is to split banks in theory but not in practice. Investment Banking has been given extra risk weighting and the retail banking is ring-fenced to protect taxpayers.

So now we have this. IN stead of RBS selling its investment bank and there being separate units, we have investment banking scaled back and nearly killed off - but not allowed to be set free to see if it can work independently or not.

This is going to be the same story at Barclays soon. It is the worst solution, splitting the banks would have been easier, safer and probably delivered better economic returns.


Dick the Prick said...

Top post. Popping you down in the 'not happy' pile! Muchos gracias. We're all Keynsians now.

Blue Eyes said...

My guess is that Vickers looked at forcing the banks to split but found that it would be illegal. Presumably if the government had split up its own banks it would be accused of interfering in the commercial running of the banks (verboten) and/or weakening their commercial position and the likelihood of making a profit.

CityUnslicker said...

Doubtful BE, I think it is legal, but the lobbying against this was very strong. Even Mervyn could see splitting was the least worst option.

Elby the Beserk said...

"RBS is about to get a huge fine for Libor rigging"

By "RBS", I assume you mean, "the taxpayer"?

Blue Eyes said...

So you think the government does (or should have) the power to say Oi! Company X over there! Divide your different functions into totally independent parts! ??

The only times I can think of [private] corporate demergers being forced by the state has been under the auspices of competition law, not by industrial planning.

Nick Drew said...

well, BE, govt's everywhere have typically set very different tax-rates for different parts of the oil value-chain, and told oil companies to ring-fence their various operations in such a way as not to allow tax-arb across their internal divisions

likewise, utilities have been required to ring-fence operations which come under different regulatory regimes (though there is often an underlying competition aspect to that, I'll grant you)

BlackRaven said...

why would seperation reduce systematic risk. It seems that it is taken for a given, yet there is absolutely no evidence for that.

The US government has made 20bn on its bailouts and counting. The reason the UK is still underwater is terrible structuring and timing.