David Prosser: It's only half-time in the battle against the banks

Outlook: Much of the criticism that Sir John Vickers' report faced yesterday concerned his failure to do something he was never asked to do – prevent bank failures
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The Independent Online

That Sir John Vickers felt he had to reject suggestions that "we bottled it" speaks volumes about the atmosphere in which his Independent Commission on Banking has operated from the very beginning. Sir John has had to conduct his inquiry in the face of threats – not always so veiled – from the banks, particularly HSBC and, latterly, Barclays too, to find greener pastures should he push them too hard. He has also known all along that the launch of the inquiry was a political solution to divisions between the Tories and Liberal Democrats over banking reform that might otherwise have jeopardised the Coalition.

In that context, the proposals published yesterday by the ICB are a pragmatic set of solutions to some knotty difficulties. Sir John has not been so cowed by the banks' warnings that his recommendations are painless for them. And he has managed to deliver meaningful reforms that will be acceptable politically (there being little point in a radical report that ends up in a dusty filing cabinet in a dark corner of the Treasury).

Not only do the interim conclusions of the Commission address the "too big to fail" issue that remains the most worrying legacy of the financial crisis, but they also offer some modest improvements to the competitive landscape of retail banking.

Indeed, much of the criticism Sir John faced yesterday concerned his failure to do something he was never asked to do. The Commission's brief was not to work out how to prevent a bank, even a large one, from failing in the future. The idea was to reform the banks so that one might fail without threatening the rest of the financial system – thus leaving taxpayers with no choice but to bail it out. Under Sir John's proposals, the Government of the day would have the option of letting a large British investment bank collapse. There would still be arguments for a bail-out – a collapse would still have consequences for the financial system or the wider economy – but the implicit taxpayer guarantee would no longer stand.

Three cheers for Sir John then? Well, two for the moment. For one thing, these are interim proposals – the ICB must see the job through to September and there will be plenty more effort from the banks to water down the proposals.

On competition, the results are likely to be at the margins (though consumers, so apathetic about their current accounts, must share some of the blame for that). On safety, too, Sir John will have to confront fears about the cost of more capital being passed on to customers (though the National Institute of Economic and Social Research dismissed such worries yesterday, suggesting that the proposals might prompt the equivalent of a mortgage rate rising from 5 to 5.2 per cent).

Still, this is a sensible start to banking reform. The bigger challenge ahead now lies with policymakers: until they succeed in their ambition to reduce the dependence of the UK economy on financial services, the behaviour of the banking sector will remain disproportionately important – and controversial.

Time for reforms at Alliance Trust

Search for Alliance Trust on Google just now and the top result is not the site of the UK's biggest investment trust itself – that comes second – but an action group set up by the activist investor Laxey Partners. It is evidence of just how seriously Laxey is taking its campaign for reform at Alliance, which is due to release its annual results today.

That campaign has become increasingly personal. Laxey now says it is concerned that Katherine Garrett-Cox's nomination to the supervisory board of Deutsche Bank might distract her from the day job of running Alliance. And it has singled out Robert Burgess, boss of the savings scheme at the investment trust, for criticism, focusing on the pay and bonuses he has received.

For Alliance, this row is becoming ever more difficult to ignore. For one thing, Laxey appears to be winning support from other shareholders. For another, leaving aside its complaints about Alliance's management team, Laxey's central case – that Alliance's investment performance has been lacklustre and that the trust has allowed the discount at which its shares trade relative to the value of its assets to widen too far – is there in the statistics for all to see.

What Laxey wants is not lower salaries for Ms Garrett-Cox or her colleagues, but an automated mechanism that would require Alliance to intervene in the market to bring down its discount (which would net the Laxey immediate investors). For its part, the trust does not want to give up its discretion to act when it sees fit – the problem being that its performance does not justify it retaining such responsibility.

How do we make Iceland pay now?

Iceland's electorate has cut off its nose to spite its face. In rejecting a plan to repay the UK and the Netherlands some £4bn the two countries shelled out when the Icelandic banks collapsed, the no campaign may have won its principled argument that taxpayers should not have to pick up the tab run up by a private company. But if the international court that will now rule on this dispute forces Iceland to do so – as one would expect it to – Iceland will pay more interest than under the deal just rejected. And in the meantime, the country's efforts to get back on an even keel – via EU membership, say, are at risk.

Still, the British and Dutch governments need to be proportionate in their response to this rebuttal. This is not really £4bn we are talking about, since the assets of the banks will cover most of the sum owed. The actual repayment disputed could be as small as £170m. Iceland's population may be stubborn, but they have suffered enough.