Jesse Norman MP is a member of the Treasury Select Committee.
The Banking Commission report, out today, marks a watershed in banking regulation. Its five members combine in-depth economic, regulatory and financial knowledge with great independence of mind. They have directly addressed the weaknesses in the sector that helped caused the 2008 financial crash. But their recommendations also carry crucial implications for the future.
The 2008 crash occurred because the financial sector as a whole and specific institutions within it became massively over-leveraged (i.e. indebted) vs. the amount of capital they possessed; because they took huge risks which they either did not understand, or were heedless of; because those risks were assessed using standard models whose failure created a herd mentality to stampede when the crisis struck; because the banks in question were grossly under-supervised; and because different governments, and in particular those of Tony Blair and Gordon Brown, became reliant on the banks for tax revenue and egged on the sector’s growth with loose monetary policy and light regulation.
Clearly, much of this is outside the remit of the Vickers report. But the key recommendations go to the heart of the industry’s problems. Non-retail arms of banks, i.e. investment banks, should be able and allowed to fail; universal banks must separate the balance sheets of their retail and investment banking arms, to insulate depositors’ capital from wholesale market risk; the banks should carry a minimum buffer of 10% of capital, to prevent over-leveraging; and Lloyds must sell branches, to create more competition on the High Street.
Some people are already complaining that the Commission stops short of a full split of “casino” from “utility” banking. But in fact its recommendations have the potential to be quietly revolutionary. In particular, the segregation of retail and investment banking capital may in fact cause some banks to split apart of their own accord, rather than by government fiat.
But the Vickers report itself will be unavailing without long-term support in two further key areas: improvement in bank supervision and regulation, and measures to increase competition within finance. Both areas are of great interest to the Treasury Select Committee, and the Committee will continue to examine and report on them in the months ahead.
One final thing: readers will hear much grumbling in various quarters over the next few weeks about increased costs to the financial sector of the Vickers reforms, which have been estimated at up to £5 billion. They might want to note that the Bank of England has estimated the taxpayer subsidy to the financial sector to be some £100 billion. That rather puts the issue into perspective.