By Ian Welch, head of policy, ACCA
The long-awaited interim report from the Independent Commission on Banking, headed by Sir John Vickers, has been published today and already the UK blogosphere is alive with cries that the Commission has not gone far enough.
It is true that many would have liked a break-up of the big banks and a formal split of the retail and investment arms. In our 2009 report 'the Future of Financial regulation', ACCA sympathised with the thoughts behind a return to the Glass-Steagall era. While the proponents of universal banks tended to focus on the fact that the original law was introduced in the era of the Great Depression in 1932, it should be remembered that it was as recently as 1999 that the Clinton administration repealed the law. And it can certainly be argued that looser banking regulation since then contributed hugely to the crisis. Mervyn King, Governor of the Bank of England, has repeatedly said that there is no obvious reason why the complications inevitably involved in splitting investment and retail banking should not be overcome.
But one of the problems is that while back in 2009, it seemed that the G20 countries were coming together to co-ordinate financial regulation, two years later things have retreated to a national outlook.
Or, it could be argued, to 'normal'.
While ACCA believes that effective supervision should always be carried out at a national level – one of the principles we set out in the paper was that the regulator should always be closer to the regulated, so that both sides fully understand and appreciate the objectives of the exercise – we hoped that international agreement over best practice and shared fundamental principles would continue.
In reality, this has not happened. The UK is the only leading economy with a 'bank tax' and no other country is actively considering splitting the banks in two. So it is perhaps understandable that the Vickers Commission, even had it been so inclined, has backed away from recommending such a step.
But the proposal it has put forward, to 'ring-fence' the retail from investment arms, and for it to be run under a separate subsidiary, seems a sensible compromise. Capital requirements for the banks will be higher than that proposed under the Basel III Framework – 10% compared to 7% – which no doubt the banks will protest at. And while it is true that the more capital banks are required to hold is capital not available for lending to businesses (the dichotomy at the heart of the government approach to the banking issue) nonetheless this does not seem unreasonable.
It is good to see that competition has been put at the heart of Vickers' thinking. For while the Commission has inevitably concentrated on the high street end, with Lloyds Banking Group faced with selling hundreds of branches, the fact is that competition or the lack of it, was instrumental in creating the financial crisis.
The existence of 'too big to fail' monoliths is anathema to competition and hence to effective regulation. Higher capital requirements and 'living wills' are sensible measures but they also echo the sound of stable doors being locked long after the horses have fled. There is no easy answer to how to deal with the SIFIs (Systemically Important Financial Institutions) but the emphasis on competition and on restoring consumer confidence – consumer deposits and payment systems will be protected via the ring-fenced operations even if the wider system fails – is good.
The five months until the full report will no doubt see vigorous lobbying by the banks against measures they do not like, and equally furious denunciations from some commentators that Vickers has pulled his punches. But in a difficult situation, the interim report seems to have steered a steady course.
Update: Liam Halligan’s piece in the Sunday Telegraph on why he thinks we need a complete separation between retail and investment banking is worth a read.