Banking report: is it a game-changer?

“These are far-reaching, transformative and a landmark” proposals, announced Sir John Vickers in launching this interim report on the future of our banking system.

My sense is right now that is something of an overstatement.

Almost all will be decided in the devillish detail of what gets ringfenced, how strong are rules on subsidiaries etc. The history of bank capture of regulatory and political authorities in Britain (and around the world –  see Simon Johnson’s 13 Bankers) leaves me sceptical that this will end up being transformative.

So wheras many intelligent laypersons may think that post-crisis, taxpayers should be insulated from the activities of the investment bank casinos; that toxic potential of high finance should be in some sort of steel containment vessel, the reality of the Vickers Commission is that it is more likely that their high street bank has been placed in a kind-of bubble wrap.

The central recommendation of ringfencing high street banks is a clever one. Whatever happens, retail depositors should not be able to be used as a prospective human shield to bailout a incompetent gambling bank like Sir Fred Goodwin’s RBS. But it can be executed in a soft or hard manner. Call it a Soft Vickers or a Hard Vickers.

The Commissioners are well aware of this. I put point 4.87 on page 90 to Sir John directly. It reads: “the balance of arguments might favour separation” if the rules around subsidiarisation are too weak or the costs of ringfencing get too high. So the Glass Stegall type option is still just about on the table, probably as a bargaining chip. Sir John told me though that the “main beam” of attention should be on ringfencing.

The second strand of this is the increased tier one capital requirements for the domestic retail arms inside the ringfence. Ten per cent domestically regardless of international agreement (compared with Basel III‘s 7 per cent minimum) sounds pretty strong. But it is not tough compared with the fact that the UK banks are pretty much there already. And in Switzerland they have one for capital requirements of 19 per cent by 2018, including capital-like debt instruments called contingent convertibles, or co-cos.

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So it is possible that 10 per cent, far from being tough, will in fact be seen as the starting gun on a race to the bottom, that reins in the tough starting position in the likes of Switzerland.

Again Sir John was pressed on this and suggested that 10 per cent was “a minimum”. Let’s see how that pans out.

And it isn’t just that. There are a plausible set of reforms that could sound quite tough. But the one unarguable lesson of the past twenty years if that a bankers’ incentive to wriggle, outwit and cheat the rules is pretty strong.

And right now the theoretical benefit for taxpayers from not having to bail out toxic casino debts, is likely to be less real than the actual increase in banking costs that will be passed on to bank customers (who are presumably the same people as the taxpayers). It would not be surprising at all if the bankers use the extra costs as cover to enact a longstanding plan to charge for current accounts, for example.

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Ultimately it will be down to George Osborne and the Coalition to decide. A regulator, and a politician will have to acquire a steel constitution to credibly see the theoretical thrust of this through to its conclusion. In essence the ringfence only works if the investment banks aren’t bailed out, and that is the decision of a future Government in crisis time.

It’s not very hard to jump over a ring-fence. Or to design a ringfence that is fairly easy to skip over. George Osborne, Vince Cable, and importantly a cautious Prime Minister will have to decide how hard or soft they want to go. The Vickers Commission has provided a reasonable innovative structure, now it’s up to the politicians, in the face of bank lobbying, to decide whether it really is transformative.