David Prosser: The market's view is that Vickers has got it right

Outlook: We may not yet be ready to sell off the banks we rescued but we are at least now preparing to return banking risk to the private sector

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The Independent Online

Publicly listed companies offer the world a handy yardstick with which to measure the importance of all the stuff thathappens to them: the stock market may not always make the right judgements, but a company's share price movements following a given event at least provide an aggregation of everybody's views about its significance.

So to Britain's banks, whichall outperformed their counterparts across the rest of Europe despite – at last – the publication of the final report of the Independent Commission on Banking. That looks like a warm welcome for the proposals made by Sir John Vickers' inquiry.

The lack of reaction reflects both the fact that the Vickers report contained no unpleasant last-minute surprises and that, for all the warnings of the City's lobbyists, the effect of the reforms will be relatively benign. Benign for the banks that is, but of real benefit to the economy and the taxpayer.

For at the heart of this report is the drive to shift banking risk off the state's books back to where it belongs, with the sector's shareholders – who, after all, get most of the spoils when their institutions are performing well.

We may not yet be ready to sell off the banks the taxpayers have had to rescue, but we are at least now preparing to return banking risk to the private sector. Whatof the dire warnings about credit and the economy made in recent weeks? Well, there are many things to admire about the Vickers report – and plenty more questions to answer, too – but one of the most pleasing is its systematic demolition of all those self-interested sirens.

Above all, the report makes the compelling argument that thebenefits of the reforms will far outweigh the economic cost – and that without them, the banks, too, would be worse off because much larger capital requirements would be needed to achieve the same effect.

Will the UK's pre-eminence in financial services be eroded? No, the reforms should enhance its international reputation. Will reducing leverage hit economic growth? No, it was excessive leverage that has hit the economy so hard. Will credit be constrained? No, banking stability should ensure continuity of credit rather than boom or bust.

No wonder those share prices were so robust.



Bank customers have to play their part

Still, there is plenty more work to be done. For example, one might describe the competition aspects of the reforms proposed by Sir John yesterday as supply-side. Encouraging the emergence of at least one new bank of scale, making it simpler for people to switch accounts and improving product transparency are all measures to improve the supply of competitive pressure in the banking industry. Very sensible they are, too, but the reforms don't address the lack of demand for more competition.

That sounds like an odd thing to say – surely everyone would want the market for current accounts and other banking products to be more competitive? Well, yes, in theory. But over the past two decades, the considerable efforts of consumer groups that have tried to persuade people to show such demand really exists by switching banks have mostly been in vain.

So marked has this failure been, it cannot simply have been a reflection of the difficulties of changing bank. In truth, even before the changes now proposed, switching current account provider has become a far simpler process. Yet customers have consistently failed to take advantage.

Why should this be so? Well, one reason has been the low monetary gain for most people in switching, since small balances are the norm in current accounts. Another has been the perception that banks are all the same – the suspicion that what really annoys people about their banks, poor service, would simply be replicated elsewhere. In short, people think the gain to be had from switching will not justify the pain of doing so.

It's hard to know how the regulatory process might address that perception, except over the longer term by banking watchdogs that are less tolerant of poor service. The challenge is bigger than ensuring that a new bank of real scale emerges from these reforms – it will have to be a bank that breaks the mould to which weary customers have become accustomed.



Lessons from across the Atlantic

For a vision of how the months and years in the run up to the full-scale implementation of the Vickers proposals may play out, look at the wrangling over similar reforms in the US. There, the "Volcker rule", named after former Federal Reserve chairman Paul Volcker, the first to propose a ban on banks' conducting proprietary trading, is due for introduction next summer, but the arguments about the fine print of the regulation are stillraging. Next month's deadline for a draft version of the regulation looks likely to be missed.

The reason for the hold-up may sound familiar. The moment the Dodd-Frank banking laws were passed in the US in July 2010 (the Volcker rule is one part of that legislation), Wall Street lobbyists began searching for wiggle room. Their strategy has been to warn of the higher borrowing costs US companies could face as a result of this attack on banking profitability and to push for the loosest possible application of the rules.

It is a strategy that has borne fruit. The banks have already won exemptions from the ban on proprietary trading and the delay in publishing detailed regulation might mean next summer's implementation has to be pushed back.

Banking lobbyists here will have been watching with interest (though they neglect to mention the Volcker rule when complaining about how ringfencing proposals here are unparalleled in other major financial centres).

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