While Sir John Vickers goes through his promotional round for the final report of his Independent Commission on Banking (ICB), I observe with regret that his report recapitulates the errors of the past. Sir John draws attention to the history, but gets it dead wrong. No surprise that the policy follows suit. George Osborne has done his duty by publicly accepting the report, but fortunately he has given himself eight years to correct its mistakes.
In particular the ICB piles on new levels of regulation, when the problem was that former regulations were either poorly conceived, imperfectly enforced or went unheeded. Additionally, the ICB’s proposals run the risk of encouraging moral hazard, while the report fails to get to grips with the systemic risk inherent in the deficiencies – current and expected – of international capital regulation.
My purpose here is not to defend either the banking industry or its present structure. Instead, my intention is to suggest reform that addresses the sector’s real problems.
The ICB’s report has three central recommendations: in its own order of priority, they are a retail ring-fence, loss absorbance, and competition. I argue that the priority should be reversed, with competition to the fore, loss absorbance revisited and ring-fencing abandoned.