Vickers to lead shake-up of British banking

Former Bank of England economist to lead investigation of the role and risks taken by banks

Sean O'Grady@_seanogrady
Sunday 23 October 2011 07:47

An historic shake-up of the British banking system was heralded yesterday with the appointment of a former senior Bank of England official to chair an Independent Banking Commission. Sir John Vickers, a former Bank chief economist and head of the Office of Fair Trading, has been named by George Osborne as the man to stop any repeat of the financial traumas of the last two years.

It is further evidence that the Bank's Governor, Mervyn King, is in the driving seat of reform; the role of the Financial Services authority and its chairman, Lord Turner, has been relegated to that of consumer watchdog. Lord Turner was New Labour's favoured trouble-shooter, for everything from pensions to climate change. Now his future is less clear. Much of the FSA's role will be devolved to a new Consumer Protection Agency and an Economic Crime Agency.

The Chancellor told the Commons that Sir John Vickers' Commission would be charged with:

* reducing systemic risk in the banking sector, "exploring the risk posed by banks of different size, scale and function";

* mitigating moral hazard;

* reducing the likelihood and impact of firm failure; and

* promoting competition in retail and investment banking, "and in particular considering the extent to which large banks gain competitive advantage from being perceived as too big to fail".

Mr Osborne said: "The worst financial crisis in living memory highlighted the significant detrimental impact that failure in the financial sector can have on the real economy and the public finances. We need a proper debate about the future structure of banks, the relationship between retail and investment banking, and the question of how to ensure greater competition in the banking industry."

Labour's former City minister Lord Myners criticised the Chancellor's statement for being "charged with political overtones" and warned that the commission's report would be published too late, months after the G20 meeting in Seoul this November. He said: "Surely it's right that there should be an interim report from Sir John Vickers before Seoul so we can test the Government's position in Seoul against the recommendations coming forward?"

Angela Knight, chief executive of the British Bankers' Association, said: "We welcome Sir John Vickers to his post. We will work with the Government on this and all other banking and business issues. The UK has moved further and faster than other major economies on banking reform. We urge the Government to ensure all changes take account of the international reform agenda."

For the CBI, the director general, Richard Lambert, added: "We welcome the terms of reference for the new Independent Commission on Banking. They pose the right questions in the wake of the banking failures, and they do not prejudge the crucial issue of the future structure of the UK's banking system.

"Business relies on a healthy and confident banking sector, so the sooner these issues can be resolved the better. Sir John Vickers, a distinguished economist with great experience of competition policy, is the right person to chair the project."

The Commission will produce a final report by the end of September 2011. The Commission will report to the cabinet committee on banking, chaired by Mr Osborne, with the Business Secretary, Vince Cable, as deputy chairman.

Economist with the future of lending in his hands

Sir John Vickers is an interesting choice to head the commission charged with recommending whether or not to break up Britain's biggest banks.

An economist of some repute, he first came to public prominence 25 years ago with work on the privatisations of the 1980s, which argued that competition and regulation were more important determinants of the efficiency of a company than its structure of ownership.

That thesis might encourage Britain's biggest banks to hope that Sir John pursues lines of inquiry other than the nuclear option of busting them apart.

Still, the banks cannot rest entirely easily. Sir John's economic background is strong (he was until recently president of the Royal Economics Society) but he also has hands-on experience of a regulator charged with confronting the industries it polices.

He served as chairman of the Office of Fair Trading for five years unti March 2005, though his term of office pre-dated several combative inquiries by the regulator into the credit card and banking industries, which saw a string of bitter disputes with financial services companies.

While Sir John has never dabbled in party-political matters, it will not have gone unnoticed by George Osborne that he was happy to put his name to a controversial open letter to Alistair Darling earlier this year, which urged the then Chancellor to set out plans for tackling Britain's budget deficit much more quickly than he had at the time proposed to do. As a former chief economist of the Bank of England, Sir John's signature on the letter was seen as particularly significant, and the Conservatives seized upon its message gleefully as they sought to attack the Government over its record on borrowing.

Sir John is currently Warden of All Souls College, Oxford, and served for 15 years as the Drummond Professor of Political Economy at the university, during which time he served a stint on the Bank of England's Monetary Policy Committee.

His latest role will see him balance the potentially conflicting demands of the Chancellor and the Business Secretary, Vince Cable, who has been notably more aggressive in calling for banking reform.

David Prosser

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