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Britain is in the grip of the most protracted slump in 100 years, and - of course - it's the banks wot done it
Britain is, in the considered opinion of one of the Vickers commissioners, in the grip of the most protracted slump in 100 years, and – of course – it's the banks wot done it. In these circumstances, the erudite panel tasked with reviewing the financial system produced a blueprint that should prevent the same people doing the same thing in the same way again. Necessary in so far as they go, the real question about the recommendations is whether they are truly sufficient, or whether they will fail to answer the righteous rage gripping the public.
This argument, however, lies a little way in the future; on Monday it was drowned out, as politicians lined up to hail a "radical overhaul". No matter that you had to plough through 80 pages of the report before encountering the word "bonus", the bleating of the CBI in apparent defeat suggested this was a document with its finger on the popular pulse. To be sure, the Independent Commission on Banking has performed the important but relatively narrow task that it settled on with acuity, namely protecting the taxpayer from a re-run of 2008. Assuming the government delivers on Vickers as promised – quite an assumption, seeing as the timetable reaches further into the future than many ministerial careers will do – banks will be required to keep more of their own money aside for rainy days. In addition, where they want to borrow, they will be required to raise some of the cash through bonds which automatically share in any pain, so that instead of Exchequer bail-outs we will have investors being bailed-in. This goes beyond Basel accords, giving a useful global lead.
But the suggestion that caught eyes was splitting (or nearly splitting) retail from investment banks. No matter that Lehman never took a savings deposit, or that Northern Rock was supposedly dedicated to the regular customer, if you stepped in to your high-street branch and found that it had knocked-through to William Hill next door, you would be especially disturbed. The dire fate of monstrous cross-breeds like RBS justifies this instinctive anxiety. Now the world knows governments will underwrite every last savings account, it is imperative to draw a line around that guarantee, so taxpayers never again have to write cheques to make peace in faraway financial realms, of which they know little. The simplest thing would be a bar on owning both types of banking operations, but awed by the importance of Britain's financial giants, and wary of the threats to leave which some make, the commission shrunk from this, and instead proposed splitting high-street banking into a dedicated arm. The immediate question is whether such divisions could be kept truly at arms length. The briefest peek into the world of company taxation reveals that the modern corporation possesses Transformer-like qualities – with limbs that come, go and metamorphose in the scramble to avoid obligations. The Vickers plan for governance includes two separate boards, and is meant to be secure. Well, we shall see.
The careful cost-benefit terms in which this concession to the bankers is justified stir deeper questions. The commission has measured every dimension of finance's problems, but the crisis has bent the yardsticks. They talk of removing subsidies so risk can return to a market price, and yet investment risks are not currently priced by reason but by depressed animal spirits. There are some really bold ideas for breaking from the slump, such as a national investment bank to put idle hands and idle money to productive work. The commission, however, opted to stick within the conventional wisdom, stating blithely on page one that it is never for the state but for "the private sector disciplined by market forces" to make investment decisions. But after all that has happened, it is not longer good enough to hold the old truths to be self-evident.
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