Banking on Vickers


             On Monday 11th April we will hear or read the preliminary conclusions of the Vickers Report into banking. A lot is riding on a successful outcome to this important Inquiry.

              Politically John Vickers has to say enough to persuade people he understands the anger many feel about the conduct of banks and bank regulators prior to 2008, and the frustration they feel about the large sums of public money used to buy up Northern Rock, RBS and part of Lloyds/HBOS. Technically he has to understand what brought and keeps so many banking jobs in London, and how he can in the future keep income and wealth generation here whilst cutting the risk and size of any future bail out by taxpayers.

             His analysis will be important, as well as his conclusions. I hope he will illustrate how there were two phases to the regulatory disaster – the first one when they allowed too much credit and leverage in the system, and the second when they allowed too little and starved the market of funds. His story will have to include the fact that Northern Rock and Lehmans, the two worst casualties of the Anglo-American crunch, were specialist banks, not large general banks combining investment and retail banking. Forced separation of the two components would not of itself have prevented the 2008-9 rolling collapses.

               I trust he will seek to make changes to address two big issues. The first is the question of “too big to fail”. Early briefing suggests he will propose that the necessary utility UK banking arm of a large bank should have its own balance sheet and its own means of continuing in business whatever may befall the rest of the organisation. Alternatively it should be capable of separation in the event of a crash of the global  bank owner. The latter proposal is probably the easiest answer, and the easiest to sell to the global banks in London.

                   All that matters to UK taxpayers is that any future crisis is not only less likely, but also much cheaper and easier to deal with because it will only relate to the essential utility UK banks. The rest of the banking groups will have to follow market disciplines in the event of a crisis, which could include a controlled move into Administation or temporary protection from creditors whilst it worked out how to sell assets and write off lossses.

                     The second big issue is how we can have a more competitive banking sector in the UK. Individuals and small and medium sized companies are not well served, and could do with more choice, better service and more competitive prices. The EU has made RBS and Lloyds sell off some assets in UK retail banking to provide some competition. Sir John could ask for more to be done from the RBS stable whilst it remains in public ownership.

                      It would be good if another couple of High Street banks could be hived off from the state assets owned by taxpayers. At the time of sale they could raise more private capital so those new banks would have money to help grow their businesses and give them a stronger position in a more competitive UK High Street. We have lurched from far too much credit to too little. The Regulators are now restricting the flow, and the few banks we have left are keen to sort out their balance sheets by squeezing their loan books.  Regulating too tightly brings other problems to regulating too loosely. We are suffering from first one, then  the other.


  1. lifelogic
    April 10, 2011

    The second when they allowed too little and starved the market of funds started straight after the collapse and still continues and casued huge numbers of jobs to be lost projects and investment to be shelved.

    There are several problems with banking. Too little competition, too much incentive to create pieces of valueless paper to sell on to others, poor incompetent regulation and liquidity accounting rules, poor systems for shareholders to control directors, top pay and strategy within the bank due to company law. Also 52% tax must go or the banks will. General poor quality of decision making on lending with a detachment between decision makers and so called managers at lower lending levels.

    In 25 years in business I have always found them to be slightly mad often refusing loan for no good reasons and lending when I thought they should not. Fashion seem to be the order of the day. The general rule is if the bank is very keen to lend it is probably not the best time to be buying.

    1. lifelogic
      April 10, 2011

      I read in the Sunday time that the government may have another sensible policy after nearly getting rid of HIP’s and ID cards and the M4 bus lane. Namely getting rid or relaxing MOT’s which had absurdly been expended to cover tiny chips in windscreens and tiny crack in number plates.

      Please can they also look at pointless energy performance certificates, gas safety certificates, electrical wiring – indeed all areas of building control, indeed all bus lanes and the many pointless traffic lights and all the other parasitic and pointless job creation schemes please.

      1. FaustiesBlog
        April 10, 2011

        The EPCs, electricial wiring regulations etc., are forced upon us by the EU.

        Better off out!

  2. Michael Read
    April 10, 2011

    Spot-on analysis. But it’s an insular view, surely.

    Following your recipe or variant, and without the US mirroring these changes, US banks will have a significant edge to clean up, and wipe out UK Financial Services PLC.

    That, perhaps, is not such a bad thing. Correction. Probably, a disaster at the present time. An orderly transition to a less prominent position in the UK’s economic mix would be ideal.

    1. MickC
      April 10, 2011

      It is never a bad time to start getting things right. The banks are extremely unlikely to leave the UK. Even if they do, it won’t be a bad thing-they have sucked too much out of the country.

      If the government does not take appropriate (i.e. strong pro consumer)action on the banks, the voters will take action against the government.

  3. forthurst
    April 10, 2011

    First of all I think that the banking industry as currently constituted is a poster boy for the Labour Party. It is almost impossible to make a credible case for Capitalism when everybody knows that the major beneficiaries are paid absurd amounts of money gambling as in a casino in which the house not only pays their winnings but also covers their losses and, make no mistake, we are the house: the money is coming from somewhere, pension funds performance, costs of borrowing, prices of staples, costs of imported manufactures, costs of insurance.

    In one sense, JR is correct in putting all the blame on regulators and Central bankers but that should not be taken as an exoneration of the massive frauds which were at the core of the recent collapse. It means that there is an overwhelming case, not only for a radical restructuring of the banking industry to prevent the possibly of another domino collapse, but also for close supervision of their activities so that deceitful and predatory behaviour cannot be rewarded and will be punished. Do we need CDOs? Let the original mortgagee keep that loan and ensure that it is based on a conservative valuation and the probability of repayment. Do we need CDSs? Why? So that crooks can sell toxic products and then bet against their victims or the victims of others who have been whispered on the grapevine? When I buy or sell stocks, should I be obliged to engage with front runners or flash traders? Should I be at a disadvantage to those with shortest runs into the exchange? Why should markets not be open and transparent and fair to all participants?

    People and companies need the choice to deal with institutions that are run by proper bankers who lend responsibly and don’t engage in proprietary trading. As to so called Investment banks, the services they offer on an agency basis could as easily be provided by a conventional bank in theory, but in respect of proprietary trading, should such an institution be permitted limited liability? I see no reason why they should not be wholly responsible for their own self-generated losses if they expect to keep the lion ‘s share of the profits. What if no one would work for such as institution? And? There is far to much ‘noise’ in the markets. It is not healthy that there is so much more turnover than the taking and holding of positions.

    The bankers can win a Pyrrhic victory which the government must prevent.

  4. Simon
    April 10, 2011

    Quote “keeping income and wealth generation here” .

    How much of this income is due to exports of services ?

    Are banks significantly improving the countries balance of payments or are they mainly acting as rather expensive subcontracted tax collector for a Govt which can never get it’s hands on enough money ?

    Maybe this is why it’s easy to get the impression that the priority of the Govt is to help the banks out . One would have expected new entrants into the market if the Govt’s priority was to get the country back on it’s feet .

    Zero-sum game synthetic instruments with counterparties such as synthetic credit default swaps have absolutely no social benefit , do they ?

    Such business would be considered fraud in the insurance industry wouldn’t it ?

    Banks which wish to get involved in them , especially for their own proprietary trading , should be forced to apply for a betting license as the only companies qualified to do such business are turf accountancies .

    If the gross exposure of the taxpayer to synthetic instruments cannot be limited , and to substantially less than the deposits being guaranteed , then we must be prepared to let the banks go as we cannot afford to keep them .

    The Govt has no right to force the taxpayer to operate as a turf accountant either .

  5. Bob
    April 10, 2011

    I think the de-mutualisation of the building societies was a mistake.
    We need them now, and we need rid of the current banking cartel.

    The Tories should also make the general public aware of the root cause of the credit crunch.
    Link:How Political Correctness Caused The Credit Crunch

    1. forthurst
      April 10, 2011

      So Political Correctness caused an over expansion in credit from the FED, tickler loans to mortgagors, packaging of those mortgages into tiered CDOs, the preferment of investment grade status by credit agencies on them, sale of those CDOs to British banks and others in which the lower initial graded tiers were re-tiered to create more higher grade CDO tiers before the tickler period ran out and the mortgagors were no longer able to cover their mortgage premiums from their benefit cheques. There is also evidence that some CDOs were sold entirely without mortgage backing so were in fact a pure pyramid scheme.Houses were foreclosed without legal proof of title, rather difficult when the original mortgage may have repackaged umpteen times. Then of course, those extremely clever people who anticipated correctly that at the end of the tickler period there would be widespread defaults and therefore shorted those products and bought CDSs against the institutions that had failed to do ‘due diligence’ on the ‘investment grade’ paper they had bought, which caused huge losses at the institutions that sold the CDSs. But it all came right in the end because the FED loaned a load of money to the US government which used it to bail out financially embarrassed institutions and of course the US government issued treasuries (debt on the people) in payment to the FED for graceously agreeing to create money out of thin air.

      Another theory is that it was the Mexican drug cartels withdrawing all their money as regulators became active in prosecuting money laundering which caused a loss of liquidity in the whole banking system and triggered the collapse.

      1. Simon
        April 10, 2011

        Here is my go at indentifying the number of different attempts to defraud one organisation or another and ultimately enslave the public and their children . I’m sure I’ve missed a few .

        1) the preferment of investment grade status by credit agencies on them

        2) sale of those CDOs to British banks and others in which the lower initial graded tiers were re-tiered to create more higher grade CDO tiers

        3) There is also evidence that some CDOs were sold entirely without mortgage backing so were in fact a pure pyramid scheme.

        4) Houses were foreclosed without legal proof of title, rather difficult when the original mortgage may have repackaged umpteen times.

        5) Then of course, those extremely clever people who anticipated correctly that at the end of the tickler period there would be widespread defaults and therefore shorted those products

        6)bought CDSs against the institutions that had failed to do ‘due diligence’ on the ‘investment grade’ paper they had bought, which caused huge losses at the institutions that sold the CDSs.

        7) But it all came right in the end because the FED loaned a load of money to the US government which used it to bail out financially embarrassed institutions and of course the US government issued treasuries (debt on the people) in payment to the FED for graceously agreeing to create money out of thin air.

        Now compare the total number of frauds with the total number of prosecutions plus people in jail .

      2. acorn
        April 11, 2011

        You may have seen the episode of the Keiser Report, when he said as a stock trader, he used to watch the limo’s going into the garage of one of the big American banks, on a Friday afternoon. Everyone knew that was the deliveries of the drug cash. There are blogs that imply that $300 billion of drug cash, came in very handy when the crunch hit.

      3. waramess
        April 11, 2011

        What I find astounding is that so little time is being spent on the cause of the market illiquidity, whether it be as a consequence of the Mexican cartels or the management of interest rates without due regard to savings.

        Such illiquidity in the market has never been experienced before and failure to address the cause will be to make all other remedies worthless.

    2. norman
      April 10, 2011

      It’s always struck me as amusing that the main cause of this disaster, government dictating to banks who should be lent to (under pain of being accused of redlining i.e. racism), is then held up as a virtue when our government launches soundbite after soundbite about forcing banks to lend more to small businesses, home owners, etc.

      As soon as government tries to force any private enterprise to do anything against their will alarm bells should be clanging.

      Far too late now of course as meddlesome politicians have already ruined our banking system but the best course of action would have been to leave banking to professional bankers. Then again, if politicians stuck to talking about things they knew about they’d find themselves with very little to do!

      1. Simon
        April 11, 2011

        I believe you are wrong about the main cause was “government dictating to banks who should be lent to (under pain of being accused of redlining i.e. racism)” .

        Completely agree with you though that the Govt trying to dictate to companies practically dictates disaster .

        For instance , forcing banks to build up reserves .

        Is the Govt forcing the banks to take on risky business in order to meet the Govt’s timetable when perhaps banks should be concerned with de-risking and aiming to do not much more than break even ?

    3. FaustiesBlog
      April 10, 2011

      I doubt very much whether PC was the ’cause’. More likely, the bankers saw a way to increase their profit margins by writing legislation for the US government to make it seem friendly to the poor. That’s how they work.

      In return for such ‘largesse’, the banks ensured that the taxpayer would foot the bill for loans that went awry.

      Sure, we have to blame the regulators. But we also have to blame governments for either being too limp-brained to see the moral hazard involved, or for being in the pay of bankers, one way or another.

      Who regulates the regulators? What kind of parliamentary oversight do they have? Evidently, whatever oversight they have is entirely insufficient.

  6. sm
    April 10, 2011

    I think its more fundamental than just pure economics its about control and real democracy. We don’t have either really.

    Google if you wish The Ultimate Bankster Quote – from a former Governor of the Bank of England (1920 – 1944)

    In my opinion the problem is fractional reserve banking, then big politics, we are just flotsam on the roller-coaster ride. What goes up must come down. The answer to too much leverage and credit, is more easy credit? A palliative maybe until equalisation happens via unseen hidden forces like inflation/stagflation or default.

    The banks will do what banks do and will leverage any implicit/explict state guarantees.

    Legally seperating banks is simpler rather than internal ring fencing, but the whole limited liability of banks should be re-examined, particularly if judged too big to fail. A balance sheet / leverage tax should aim to penalise too big too fail ( tick for Osbourne)

    If you want fractional reserve banking, you need to lending controls to guard asset price consumption booms and busts based on fiat money in the non productive economy. This means you need formal constitutional control of public spending in relation to real income, (ignoring GDP based on debt spending).

    This is all academic as we will find out when interest rates rise. Unless we can have some creative destruction and or newly capitalised banks to service exports and substitute imports, we will have a stagflation.

    Reducing employment taxes (NI) on manufacturing sector might help.

    Eliminate EU contributions and or leave, overseas aid, bilateral bailouts for the euro, except via IMF. Sell off the BBC and use it to fund renewables, windpower, smart grids etc. Sell-off motorways on conditional leases and bring in tolls. Reduce all unfunded economic immigration. e.g £50k for a resident visa and surety against accessing public funds. This money can fund bursaries and training for shortage skills (haha) areas.

    Restructure public service contract via limited companies without unlimited guarantees backed by the state to enable liquidation and restructuring. Public sector pensions should not be funded via Council Tax and need to be capped at the senior level to a maximum of average salary per annum of income. We need maximum renumeration legislation for the public sector and that includes banks if they require public funds or subsidy. We may need it for the private sector (exception where it has been actually taxed at 50%marginal income rates).

    Pretty soon were talking real money.

  7. English Pensioner
    April 10, 2011

    Possibly there is another approach.
    I would suggest that it might be possible for banks to become on of two sorts,
    1. Where there is strict separation between the retail banking and any investment banking, and where there would be strict oversight of the business, but in exchange, the retail side would be fully supported by the government in the event of a major problems. Deposits would be guaranteed up to the present limits, and bonuses and the like would be limited.
    2 Those which do not provide adequate separation, and allowed to continue broadly as at present, but with it being made very clear that if they fail, as far as the government is concerned they would be allowed to “go to the wall”. There would be no government guarantee on deposits. They could pay staff what bonuses they wanted.

    Banks would have to make it very clear into which category they fell, and it would be up to their customers to decide which they wanted to use. Some people might be tempted by higher returns from the “less regulated” banks and prepared to take the risk, whilst others would want to safeguard their money and be happy to take smaller returns.
    I suspect that, given the right circumstances, retail banking could then flourish with possible new entrants to banking like the big supermarkets who would see it as a customer service which would ensure regular use of their main business. They are also used to the philosophy of customer service and making money out of small returns on each of a huge number of transactions. Certainly our retail banks could learn from Tesco & Sainsbury especially with the speed and efficiency with which they deal with customer complaints!

    So give the banks a choice, do it our way and have our support in a crisis; continue as at present, make you position clear to your customers, but get no support.

  8. Suze Doughty
    April 10, 2011

    I worry that (a named Spanish bank) is now too big to fail and who will bail it out. It seems to be a Spanish bank but the Spanish government is on the verge of being bailed out itself.

  9. Acorn
    April 10, 2011

    Who in their right mind would buy a bank? IFRS accounting massively over values them. The financial accounts they produce are pure fiction. All the assets are “marked to fantasy”. Even Arthur Daley would pass on this load of codswallop.

    1. StevenL
      April 10, 2011

      I get the impression they are all owed by a combination of day traders, high frequency machines and mug taxpayers now.

  10. JimF
    April 10, 2011

    This seems sensible, but the banks will probably have different ideas.
    Certainly on the second point, where you are driving in the diametrically opposite direction to G Brown, who followed F Goodwin in reducing competition by bringing banks together, your answer of breaking down this oligopoly must be applied. At this time we have a cartel which is a licence to both print money in the first place at 0.5% and then to steal, through usury, from those to whom it is lent. We also have silly schemes to foist this cash, secured by taxpayers, onto young first time buyers. They are first being caught by devaluation of their deposits due to QE, then by excessive interest rates, then by paying tax to prop up the banks both by increasing security against their mortgage, and by bailing out the banks when it all goes wrong again.
    There needs to be a root and branch reform of the system in the 2 areas you mention. Better that we have a partly broken but competitive system in future than the camoflaged lame duck which presently exists.

  11. S Matthews
    April 10, 2011

    I would be interested in Johns opinions regarding the credit rating agencies. It seems to me that the banking crisis was more than partially due to false ratings of the various derivatives/bonds/financial instruments relating to mortgages.
    There seems to me a problem inherent in allowing a very small number of private companies to set risk in the marketplace; insufficient competition and effectively a conflict of interest. Is this not an area where the State (The Fed, BoE etc) should be operating given the potential for another financial crisis?

    Reply: The ratings agencies did not help, but they reflected the errors of the Regulators and bankers who also thought these instruments were high grade.

    1. S Matthews
      April 10, 2011

      Indeed, but which came first, chicken or egg? Were the bank traders unduly influenced by the credit rating companies?

  12. Javelin
    April 10, 2011

    I think the easy consumer credit was the fundamental cause of the crunch. Banks, regulators and the public took advantage. Bottom line is banks took on risks and bond holders, shareholders, auditors, regulators, politicians and money markets ALL failed to mitigate against the risks. So if that lot failed then it’s going to happen AGAIN. Consumers got away with low interest rates and tax payers have paid dearly for it. Bond holders and share holders should have paid.

    Fundementally risks need to limited at the grass root level. So for every bit of cash going into the system the risks need to be limited (eg mortgages are 3 times salary, or actuaries need to publish risks) and all this needs to be made available to share and bond holders.

  13. nicklasridikulas
    April 10, 2011

    I’d love to see a quiet, scrupulous and dedicated investment culture that meant when I put my money into a pension/bond/investment I’d actually see a return on this money.

    As it is, I see poor returns, and feel the profit on my investment is sucked away in bonuses to the flash city-folk, so there’s little (or no) incentive to invest any further.

    So much UK capital is tied up in buy-to-rent property today, as many people don’t want to give their cash to the City. It’s a pity, as in its hay-day the City was central to matching investors funds with a good enterprise.

    Could the City revert to what it once was good at?

    Can our bankers take a bit less, so investors earn a bit more?

  14. FaustiesBlog
    April 10, 2011

    Liam Halligan has written a blinder of an article in today’s Telegraph. He has encapsulated exactly my thoughts on this issue.

    The comments are interesting, too. I hope Osborne is smart enough to read and heed them.

    1. Lindsay McDougall
      April 13, 2011

      Liam Halligan is the ultimate prophet of doom – and in many ways he is dead right. Another topic that Liam has adressed is the size of the off balance sheet deficit of the UK. For example, I suggest that you research the financing of the PFI hospitals, and how it is that a financing company employing just 14 people makes a 50% per annum return on capital as opposed to the typical 6% earned by most companies.

  15. Conrad Jones (Cheam)
    April 11, 2011

    In 1963 the debt free component of the money supply was 21%.

    Today that figure has reduced to 3%. That means that 97% of our money supply is made up of debt based money created by Banks.

    Each month, private individuals and commercial businesses make payments to pay there debts with interest. Because the Banks create this money, the amount of the principal which is paid off disappears from the money supply. Therefore, the money supply would shrink each month if new loans were not created.

    Our whole economy depends on new debt being created because debt is the basis for the money supply. 97% of our money supply requires interest to be paid on it.

    In order for people to receive payment for goods and services, they depend heavily on other people (whether directly or indirectly) borrowing money from Banks. The money – when borrowed; is created and is only dependant on a fraction of the loan amount being held in the Banks Reserve Account at the Bank of England.

    If all debts were paid, there would still be outstanding debt to the Banks as the 3% of debt free money would not be enough to clear the remainng debt left over.

    Most of the money created by private Banks was created when people took out mortgages for their homes and businesses. 60% of the current money supply was created through people taking out mortgages, this is why the Government cannot allow people to reduce their debt as the economy depends on debt.

    The Fault does not go to Private Banks but to us – we are to blame because we do not understand the problem.

    Once we understand the problem, we can then fix it, positively and creatively.
    Remember, we still have 3% Debt Free money, if that figure were to increase while preventing Banks from creating new money – then we would reduce the dependency on debt. Free Market enterprise would flourish as there would be plenty of money as the amount currently being paid in interest payments would reduce.

    The Government has the power to set in motion legislation that will reverse the debt laiden economy and encourage Businesses to flourish and at the same time, create a Pound that will be the safe haven currency of the World. And it’s not a pipe dream, it can be done.

  16. Lindsay McDougall
    April 11, 2011

    Forcing RBS and Lloyds to sell off assets without jeapordising their share prices is now the name of the game. Our goal must be to ensure that, after the asset sales have been completed, no bank is too big to fail. In addition, the companies to whom these assets are sold must be viable companies.

    Any ideas as to what those assets might be, anyone?

  17. Gary
    April 11, 2011

    The taxpayers retain the priviledge of underwriting the retail side of banking. There is so much wrong with this it is hard to know where to start. First how will anyone know if they slip non-retail(whatever that is) losses into retail? They cook their books by decree and so we will never know. Why are we still underwriting anything this parasite business. Are we now officially socialist? And what about this constant refrain that they create jobs? They don’t. For every job they create they destroy more than one productive job when they rig interest rates to inflate the money supply, neccessary for them to stay in business, which destroys the seedcorn for real capital creation, savings. This unproductive parasite grows at the expense of the productive economy. Mr Redwood I am not sure whose side that you are really on, but it does not appear to be ours.

  18. T French
    April 14, 2011

    Just like the Hutton Report on pensions this report started out with big ambitions which have become watered down to satisfy powerful interests.
    The recommendations are not what one would want from a Conservative Government. They are those of cliques looking after one another and it worries me.
    Who do I vote for next time if the Conservatives keep letting us down like this?

  19. Andrew Gately
    April 14, 2011

    and the frustration they feel about the large sums of public money used to buy up Northern Rock, RBS and part of Lloyds/HBOS

    Not actually true Northern Rock wasn’t bought. The govt. got BDO Stoy Hayward to value it on the basis that it was not a going concern.

    BDO concluded that despite having £1.7billion of capital at the time of nationalisation on a not a going concern basis the value was nil (they discounted the assets by 15% meaning you could buy £1s for 85p
    ) and no compensation was due to shareholders.

    As a former NR shareholder I believe that there was a conflict of interests between HMG acquiring Northern Rock and setting the valuation terms for compensation. As the valuation terms were artificial and did not follow the reality that Northern Rock is and has always been a going concern, I would have hoped that the Conservative party would address this unfairness but unfortunately they seem quite comfortable with the outcome.

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