Yet again the emperor has no clothes

 
Allister Heath
SURELY not. I mean, the Vickers Independent Commission on Banking couldn’t possibly be a case of the emperor having no clothes, could it? Yet as I read through the 358-page tome, a conclusion I couldn’t quite believe kept staring me in the face. If Vickers had never existed, many of the biggest reforms his report endorsed – on capital requirements, bail-in bonds, resolution, leverage caps and the like – would have happened anyway, albeit in slightly different form. Page after page is devoted to justifying what is happening anyway as a result of domestic or global reforms. Sure, for those with no knowledge of the dozens of radical new rules being introduced, and the long-overdue shift towards ensuring taxpayer guarantees are removed, it will have sounded new and exciting, the biggest revolution in banking for decades. And of course, the industry is facing huge change.

But even the 2019 deadline is similar to the Basel III deadline, and most banks may already have enough equity and certainly enough loss-absorbing capital to meet the new rules. Higher funding costs from the removal of the implicit subsidy from state guarantees, the bulk of the official cost of Vickers, would have happened anyway under UK and G20 plans. These particular costs are welcome as they are about introducing more market rigour and eliminating moral hazard.

But there is one major difference between what Vickers proposes and the emerging global consensus. Nearly everybody wants to make even the biggest banks easily resolvable in a crisis via a new kind of bankruptcy law which allows firms to be wound-down gently while hitting shareholders and some bondholders and protecting taxpayers, depositors and the payments system. Where Vickers differs is that he thinks the best structural reform is a ring-fence – unfortunately, he never substantiates this claim.

The ring-fence has no real purpose and will merely add a layer of complexity to global reforms while damaging big banks. Living wills will be harder to write. Other reforms – such as operational subsidiarisation – would have worked better. As a brilliant analysis by Simon Gleeson of Clifford Chance points out, details of the ring-fence remain vague. The view that a ring-fenced bank could continue to provide clients with a full service on an “agency” basis for its wholesale bank does not seem compatible with the idea that its relationship with its wholesale bank should be on an arms-length, unpreferred basis. It is equally hard to reconcile the idea that ring-fenced banks should be able to conduct treasury activities with the view that they shouldn’t be allowed to engage in derivatives or trading. There is another problem: it could cripple private banking in London. Individuals and small firms will apparently be prohibited from banking with any entity other than a ring-fenced bank – or at least it will be tricky for them to do so. Perhaps most damningly of all, EU banks will be able to operate branches in the UK bypassing the ring-fence.

There are many other issues. Making depositors senior creditors is a good idea – but it will hike the cost of services such as rent to the retail operations, as providers will worry about losing money. If what matters is total loss-absorbing capacity, why hike the equity component to higher than Basel III? Radical reforms are imperative – shame that Vickers chose to tag competitiveness-destroying measures onto other, sounder changes.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath