John Vickers, chair of the Independent Commission on Banking (ICB), ruled out breaking up the financial industry into “narrow banks” on Saturday in his first official speech since the commission was convened.
But Vickers’ speech, which gave a glimpse of the ICB’s thinking three months before its preliminary report is due out, did discuss how to “ring-fence the retail banking activities of systemically-important institutions” from their wholesale activities.
Despite dismissing the idea of “narrow banks”, whereby banks with retail deposits are largely banned from lending, Vickers emphasised that “the policy challenges for retail and investment banking are somewhat different”. He analysed different ways of insulating retail consumers from a possible bank failure on the basis that “retail customers have no effective alternatives to their banks for vital financial services”.
The speech signalled that the ICB is considering “forms of separation” between retail and wholesale banking operations, including subsidiarisation, in which retail and investment banks operate separately but remain legally under the same ownership.
Vickers also commented on the problem of implied government guarantees for banks that are “too big to fail”. “This distortion... should be neutralised or contained,” he said, adding: “Credible resolution would seem to require at least some form of separability (between retail and wholesale).”
But he also sounded a warning on “the unintended consequence” of some current regulations, including tax incentives that make debt a more attractive funding option than equity.
SIR JOHN VICKERS
SINCE leaving a two-year post at Shell as a financial analyst, Sir John Vickers had spent most of his career in academia before moving into economic policy-making.
He is a fellow of All Souls College, Oxford and was an economics professor at the university for 12 years until he went on leave to become the Bank of England’s chief economist in 1998.
After two years at the BoE, he moved to become director general of the Office of Fair Trading and from 2007 to last year, he was president of the Royal Economic Society.
While head of the OFT, he oversaw an investigation of charges by store card providers and called for an inquiry into LSE’s proposed merger with Euronext.
He has spent much of his career studying the economics of competition and regulation, writing extensively on patent law, price signalling and vertical markets.
He is now charged with designing the basis of a new regulatory framework for the entire UK banking industry.
TIME LINE | INDEPENDENT COMMISSION ON BANKING
● 16 June 2010
Chancellor George Osborne announced the commission’s creation under the chairmanship of Sir John Vickers. Its other members are: Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Woolf.
● 9 July 2010
The commission holds the first of its meetings, with its minutes published regularly.
● 24 September 2010
The ICB publishes a consultation paper and asks for submissions of evidence. It highlights the commission’s priority as producing regulations to promote financial stability and competition while not overly discouraging lending and economic growth.
● November-December 2010
The commission goes on a “roadshow” of public events to gauge popular opinion, holding five meetings: two in London and one each in Edinburgh, Cardiff and Leeds. The panellists and participants include representatives from the UK’s major banks and small businesses. It also holds meetings with banks and stays in regular communication with them through the period.
● 22 January 2011
In his first public speech as chair of the commission, delivered at the London Business School, Vickers outlines the pros and cons of separating retail banking activities from wholesale and rules out mandating “narrow banks” that are heavily restricted in their activities. He also emphasises the other regulatory changes taking place globally, such as through Basel III and the European Commission.
● April 2011
The commission is due to publish a preliminary report outlining its thoughts so far. It plans another roadshow of events and will solicit further feedback from banks after the paper’s publication.
● April 2011
The commission will publish its recommendations. The final decision as to their implementation lies with Chancellor George Osborne and business secretary Vince Cable.
KEYPOINTS | SIR JOHN VICKERS’ SPEECH
● Scope of the inquiry
Vickers made clear that financial stability will be just as important to the commission as competitiveness, focusing particularly on “structural reform”: whether or how to separate retail and wholesale banking. However, he was careful to place the ICB’s work in the context of international regulations on capital (particularly Basel III) and the takeover of failing institutions (to be addressed by the EU). And he ruled out broader recommendations on perverse incentives created by the tax system, despite their effect on financial stability.
● “Narrow” banks
He ruled out the creation of “narrow banks” with nothing but vanilla retail functions as a solution to the “too big to fail” problem, saying: “It is very doubtful that the implicit government guarantee would be confined to narrow banking.” He said that lending would just move elsewhere.
● Retail versus wholesale customers
He said that retail and wholesale banking require different policy approaches because retail customers are a largely domestic market and rely more on their banks for vital services. Whereas wholesale customers operate internationally and “generally have greater choice and capacity to look after themselves”.
● Differing capital requirements
He suggested that one way of separating retail and wholesale risks could be “to ring-fence the retail banking activities of systemically-important institutions” and impose a specific capital requirement on them. But he was sceptical about blunt regulations to separate the two functions.
● Senior bondholder debt
Vickers was keen to pinpoint possible ways of making sure that senior bondholders, as well as equity-holders and junior bondholders, absorb losses when a bank fails. He discussed both convertible contingent bonds (“co-cos”), which turn into equity if a bank’s capital ratio falls too low, and bail-in bonds, which can be turned into equity by regulators if a bank has to be wound up, as possible solutions.