Leading article: A skilful compromise that should usher in a safer era


It would be hard to think of anything more important to a stable economy than that people should be confident that their money is safe after it has been deposited at a bank. Banks that hold people's savings cannot be allowed to fail.

Yet the 2008 banking crisis was a painful lesson in how over-confidence and greed can drive these banks to fail, at unbelievable cost to the taxpayers forced to rescue them. The report by the Independent Commission on Banking chaired by Sir John Vickers, published yesterday, is intended to make sure it never happens again.

There will be a firewall around the high street banks in which ordinary members of the public entrust their money, to ensure that they cannot be bankrupted by the operations of "casino" banks gambling in the world money markets, even where the two entities are part of the same company.

It has to be said that is partly fiction. Let us suppose – heaven forbid – that Barcap, the investment arm of Barclays, were to drive itself to bankruptcy with the recklessness that destroyed Lehman three years ago. The high street arm of Barclays would be protected in theory, but in practice the share price would plummet, doing immense damage to the pension funds that are among the biggest investors in banking, and possibly even driving the supposedly fire-proof retail part of the bank out of business. Ultimately, there is no complete guard against market failure.

The Vickers Report has therefore disappointed those who wanted a total separation of investment and retail banks, as there used to be before the US government was persuaded in 1999 to repeal the Glass-Steagall Act, introduced in the 1930s to prevent a repeat of the Wall Street crash.

On the other side of the argument, the bankers have complained that the report's proposals will be costly to implement, a cost they may feel they have to pass on to their customers. No surprise there. The CBI has complained that new requirements on holding capital will make it more expensive for British businesses to borrow from the bank.

The estimated cost of more than £6bn sounds massive, but it actually is only a fraction of the sums these banks handle, and whatever problems the new rules pose are eased by the concession that gives them until 2019 to put the new structures into place.

Whatever the misgivings, the proposals of the Vickers Commission are a sensible compromise. The bankers may complain, but public opinion is likely to conclude that they got off lightly, and at heart they must know that it could have been worse.

But it could also have been worse for the British economy, which is so heavily reliant – too reliant, some say – on the finance sector. Had the commission gone harder in its recommendations, there would have been a risk that the Government might throw the report out altogether, so that nothing was achieved; or that if the Government seemed minded to act on it, the banks would have moved their operations out of the UK. As it is, there will likely be no clamour to abandon London.

The key now, as the Shadow Chancellor Ed Balls stressed yesterday, is to make sure the banks use their eight-year changeover period sensibly. It would be quite wrong if they did nothing for six or seven years and then implemented changes in a rush. There is, therefore, merit in Mr Balls's suggestion that Sir John Vickers' commission should carry out an inquiry in two years into how much progress has been made.

Overall, Sir John Vickers and his team have done their job well. They have reached a sensible decision and drawn a line, however thin, under the catastrophe of 2008.

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