Warning that Vickers bank reform is doomed to failure

Report comes as pressure mounts on Barclays to spin off investment bank

Sir John Vickers' Independent Commission on Banking (ICB) will today be accused of a "a dangerous dereliction of duty" by one of the Bank of England Governor's favourite economists.

Sir Mervyn King urged MPs to visit Boston University's professor of economics, Larry Kotlikoff, if they are in the US in testimony to the Treasury Select Committee last year.

In a report to be published today by Civitas, the think-tank, Mr Kotlikoff shows how uncompromising his views on Britain's stumbling efforts to reform banking have become.

In it he concludes: "A banking system that was terribly risky will, on balance, end up riskier, a regulatory system that was dysfunctional will now have many more things to get wrong and a population that was praying for a sure economic future will be left on its knees."

He describes the commission's demand that banks "ring-fence" supposedly low-risk, retail banking from high-risk, casino-style investment banking as an example of "rearranging the deckchairs" and "cosmetics".

Mr Kotlikoff also says the so-called ring-fenced "good banking" could make the situation worse because "good" financial assets can rapidly go bad: "One glance at the current eurozone crisis shows the folly of the commissioners' way. Good/safe, AAA-rated assets, like Italian government bonds, can suddenly turn bad/risky."

Mr Kotlikoff said the commission would allow good, ring-fenced banks, to borrow £25 for every £1 of equity and invest it all in gilts.

"In this case, the commission's ring-fenced banks would fail if gilt prices dropped by just 4 per cent."

The report, Economic Consequences of the Vickers Commission, argues that bankers hold a "stranglehold" on the world's economy and the political system facilitating "recklessly self-serving behaviour".

It says the world's financial system is doomed to fail again because of the "perverse secrecy" of bankers and because of the interdependence of financial institutions that forces governments to intervene when they fail to stave off a potential collapse of the payments system.

"Their [banks') threat of failure and high average profitability gives them leverage over the public and politicians – in bad times, to extract bailouts, and in good times, to operate with minimal transparency and disclosure, to produce extremely complex products that can be sold at inflated prices to unsuspecting investors, and to take on extreme amounts of leverage."

He calls banks "the world's premier secret-keepers" which "deem their proprietary information too valuable to disclose and their agents, the politicians, deem even the most rudimentary disclosure too costly to enforce".

Mr Kotlikoff wants bank deposits matched pound for pound and placed in cash mutual funds which cannot borrow, rather than allowing banks to invest them in risky activities. He said the ICB missed "an historic opportunity" with its failure to do this.

It comes amid increasing pressure on Barclays directors to re-examine the case for hiving off its investment bank in the wake of the Libor interest rate scandal.

With the resignations of Bob Diamond, chief executive, chairman Marcus Agius and Jerry del Missier, chief operating officer, some institutional investors believe it is time to re-examine the bank's structure.

Deputy chairman Sir Mike Rake is conducting a root and branch review of the business. They believe this should look at the case for a split.

"Now is a very sensible time to pause, draw breath, assess what's happened and look again at this question of a ring fence or separation," said Lord Hollick, a member of the House of Lords Economic Affairs Committee.

Start your day with The Independent, sign up for daily news emails
Voices
Lucerne’s Hotel Château Gütsch, one of the lots in our Homeless Veterans appeal charity auction
charity appeal
Arts and Entertainment
Tony Hughes (James Nesbitt) after his son Olly disappeared on a family holiday in France
tv
News
people

Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt

Sport
Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
football
PROMOTED VIDEO
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
Arts and Entertainment
Sir Ian McKellen tempts the Cookie Monster
tvSir Ian McKellen joins the Cookie Monster for a lesson on temptation
News
i100
Travel
Tourists bask in the sun beneath the skyscrapers of Dubai
travelBritish embassy uses social media campaign to issue travel advice for festive holiday-makers in UAE
News
ebooksNow available in paperback
Arts and Entertainment
Jennifer Saunders stars as Miss Windsor, Dennis's hysterical French teacher
filmJennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress
Life and Style
tech
Sport
Nabil Bentaleb (centre) celebrates putting Tottenham ahead
footballTottenham 4 Newcastle 0: Spurs fans dreaming of Wembley final after dominant win
Voices
Jimmy Mubenga died after being restrained on an aircraft by G4S escorts
voicesJonathan Cox: Tragedy of Jimmy Mubenga highlights lack of dignity shown to migrants
Life and Style
Sebastian Siemiatkowski is the 33-year-old co-founder and CEO of Klarna, which provides a simple way for people to buy things online
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Carlton Senior Appointments: Sr Wealth Manager - San Francisco - Inv AdvisoryFirm

$125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager – In...

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Day In a Page

Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas
La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

Deaf community outraged by La Famille Bélier

The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
10 best high-end laptops

10 best high-end laptops

From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
Susie Wolff: A driving force in battle for equality behind the wheel

Susie Wolff: A driving force in battle for equality behind the wheel

The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

'No abs Adam' plans to muscle in on Usain Bolt's turf

After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum