A damp squib or quiet radicalism from the Vickers Commission?

A year after it was announced, the Independent Commission on Banking (ICB) chaired by Sir John Vickers has delivered its report. The main headline taken from the Vickers report (pdf) is that banks will have until 2019 to separate their retail banking arm from the riskier investment arm. Many will feel this too long – who knows what state the financial sector will be in eight years from now.

There is no question that people who hoped the Vickers Commission report would solve the problems caused by the current financial crisis will be disappointed. It would not formally break-up the big banks, there is nothing on pay or bonuses and there is little on consumer protection.

However, the Vickers proposals would still make substantive changes to the banking sector. The recommendation banks should ringfence their retail banking services from the investment side is not a surprise, but it will still take the British banking sector closer to the way it operated before the ‘big bang’ of financial deregulation by the Thatcher government in 1986.

Although the IBC has not demanded the formal break-up of the ‘universal’ banks – and no doubt loopholes will be found to allow banks to shift capital from the retail to the investment wings – the proposal that the retail bank should never fall below a 10% capital requirement (equity to risk based asset) is a radical one.

The banking activities behind the ‘ring-fence’ would be very large, with Vickers estimating up to £2 trillion of loans and investments would be covered – more than 30% of the total of loans and investments. Many of the banks – and Barclays and RBS have already been mentioned – would have to completely restructure their business models.

Equally important to the long term stability of banks are the proposals on what the Vickers report terms “primary loss absorbing capacity”. Under this provision, all banks would be required to have capital and bonds worth between 17-20% of their outstanding loans, investments or assets. The reason for having this capital requirement is so that in any future crisis the providers of long-term loans would suffer the losses rather than taxpayers.

Although the financial crisis is not over it is clear the activity of banks had become far too risky and they had been massively overleveraged. Even if the ‘firewall’ proposal does not provide 100% protection against government bailouts in the future it is a step towards safer and sustainable banking.

With regards to competition in banking, Vickers is disappointing. A sector that is dominated by a handful of ‘megabanks’, with much less competition than there was 20 years ago, is not challenged. The report goes back on the suggestion made in April that Lloyds should sell more than the 632 branches it is already required to sell.

An independent inquiry on banking competition has also been ruled out until 2015 at the earliest and then only if the Office of Fair Trading has not already done so. That being said, it does call on the new Financial Conduct Authority to ensure banks vastly improve the information available to their customers on their bank accounts – but this won’t solve the problem of a lack of high-street competition.

The government is split on banking reform but Vickers’s proposals are so moderate it would be astonishing if the government could not support them as the bare minimum required. Among the big name pundits, Robert Peston describes the report as being the “biggest shake-up for decades” for the banks. That may be true but, unfortunately, while there is some radicalism in its report the bare minimum is all the Vickers Commission achieves.