Deborah Hargreaves

Sir John Vickers has let the banks off lightly, and ducked radical reforms As banks’ shares led the London stock market yesterday, Sir John Vickers may have had a few misgivings that his prescription for reform of Britain’s banking sector had not been tough enough. He would be right. The much heralded analysis from the Independent Commission on Banking lets the banks off lightly. Its brief was to make banks safer as well as to come up with ways of injecting more competition into the market. Eminent figures from Vince Cable, the business secretary, to Mervyn King, the governor of the Bank of England, suggested the commission look at breaking up the banks so that taxpayers could stand behind the retail branch networks while allowing the investment or “casino” operations to fail in a crisis. But Sir John and his fellow commissioners have backed away from a clear break between investment and retail banking, and instead argue that these activities can remain within the same institution if they are separated by a “firewall”. Crucially for the banks, the report allows them to transfer capital between both sides of the bank, meaning they can go on gambling with depositors’ money. Banks have got carried away in recent years by the profits on offer in risk-taking on international markets. This has little to do with providing a branch network. Retail banking should be a utility business much like running a power company or gas provider. It is an essential service for most people and should not be the root to riches. Too often banks have neglected their customers, selling ill-designed investment products and poorly performing savings policies to a captive base. Since depositors’ money is used to support their more lucrative investment banking activities, banks were desperate to protect this source of funding. The alternative would be expensive borrowing. This is why the banks will be privately cheered by the report even though they are moaning publicly about all the changes that they have endured in recent years. Sir John and his colleagues appear to have been convinced by threats from institutions such as Barclays and HSBC that they would shift out of London if draconian reforms were imposed on them. The separation advocated by the commission is a compromise that will make the system safer if it is done properly, but a clean break would be neater. The commission does not specify how a firewall could be set up and how this will operate in practice, although it does shoot down some of the higher estimates of the cost which were put at £12-15bn. Sir John will now consult the banks on how this separation can be achieved and no doubt, they will push for the most flexible way of doing it. Importantly, the report has nothing to say about the banking issue that preoccupies the public at present – bank bonuses. The commission says the City regulator – the Financial Services Authority – will deal with this. But pay policy is an inherent part of making banks safer. Many analyses of the crisis have pointed to the risks taken by bankers in pursuit of higher bonuses. It is high time there was an informed debate about the share of bank revenues devoted to remuneration, shareholders and tax. Unfortunately, the Vickers commission has ducked this issue. It has backed away from radical reform for consumers too. The commission clearly looked at dismantling Lloyds’ rescue merger with HBOS which was made at the height of the crisis and only after the government waived all existing competition considerations. This resulted in a further concentration of an already small number of banks and a reduction in customer choice. However, Sir John and colleagues instead suggest that Lloyds sell off more branches along with the 600 already specified by the EU. This would help to encourage rivals and add to the plurality of the banking system which, in theory, would mean we were better served.Customer service by banks is poor, and little has been done to improve it in recent years. Depressingly, last week’s Treasury select committee report found many of the same problems as a previous analysis had done a decade earlier. Anyone who has tried switching banks will know that it is not a straightforward process, even though mobile phone providers can manage it speedily. Some of the most effective suggestions of the commission may be the smaller ones, such as allowing portability of bank account numbers. There is no doubt that Britain’s bank system needs urgent reforms if we are to avert another crisis. Reform will also help restore the public’s faith in banks, which they need to rely on to save for their old age. Sir John’s prescription, however, does not go far enough. Banking Financial sector Financial crisis Economic policy Deborah Hargreaves guardian.co.uk

Posted by on April 12, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.