Sir John Vickers is a an accomplished senior academic, with Bank of England and Competition authority experience. He comes to the task of reporting on how the banks should be structured and regulated from a perfect background. I know he will approach it seriously with useful knowledge but no opening prejudices.
One of the first questions he needs to ask is Why did we have banking failures and problems in 2008-9? Some will be urging him to the veiw that it was the combination of “casino banking ” with clearing banking which caused the problems.
The evidence does not bear this out. The worst of the crisis was the collapse of Lehmans, a pure investment bank. In the UK the most distressed banks were three relatively small specialist mortgage banks, without Investment banking arms. Forcing Barclays and HSBC in London to divest their investment banking operations would not prevent a future Lehmans or Northern Rock.
It is difficult to avoid the conclusion when looking at Lehmans, Northern Rock, RBS, the Irish banks or the Icelandic banks that it was misjudgement by the banks of how much cash and cpaital they should keep to cover their risks, and bad judgement by Regulators who did not require them to be more cautious. Bankers and Regulators together presided over a massive expansion of leverage throughout the system. Both shared the view that the advent of new financial isntruments and larger banks alllowed more risk to be run . They threw out of the window the old ideas about prudent levels of capital and cash. The Central banks then withdrew liquidity from markets too rapdily and helped bring about the crisis.
My first conclusion is that splitting Investment and clearing banks is not the answer. Banks of all types and sizes got into difficulties, including small and specialist institutions. It is increasingly difficult to seperate investment bank activities from clearing bank activities. A business customer may need foreign exchange futures and commodity derivatives as well as a bank loan and current account. A retail customer may want investmnt management as well as a means of payment. Seeking to stop banks undertaking certain types fo financial business might just drive them offshore.