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.
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