Interview with John Vickers

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Cutting the financial masters of the universe down to size is, if anything, harder than a Herculean task: unlike stealing the apples of Hesperides, taming the banks has fundamental systemic importance. But if there was a man to tackle ‘too-big-to-fail,’ Sir John Vickers is in many ways a natural choice.

Sir John’s background explains his ability to bridge academic rigour with the pragmatism of real policy. The Warden of academia’s top table, All Souls College, was also Chief Economist at the Bank of England, Chairman of the Office of Fair Trading and a member of the Monetary Policy Committee. Chair of the Independent Commission on Banking (ICB) perhaps didn’t come as a surprise then.

Set up by the coalition government in the aftermath of bank bailouts that had too many zeros to count, the ICB’s broad job was to promote stability in the financial sector. Although Sir John readily admits that the commission’s remit “doesn’t address every issue,” he maintains that it remained “broad, but with clarity and focus.” “You have to remember,” he adds “that even if our remit is not on its own sufficient to tackle all problems, it is part of wider reform, international as well as domestic.”

Sir John made his mark when, on the 12th September 2011, the ICB released its recommendations into the glare of an intense media spotlight. The recommendations called for a ring-fence to be created in banks that combine domestic retail services (lending to and deposit taking for people and businesses) with global wholesale and investment banking operations (those ‘casinos’ we’ve heard so much about).

The aim: “to change the incentives system and get the taxpayer off the hook.” Even if retail services need government guarantees underpinning them (to avoid bank runs) socialising the losses of ‘casino’ banks whilst their profits remain privatised warps the discipline of banks towards risk, and is clearly not on.  But, “if we make the market work properly, it will discipline those needing discipline.”

In addition, the ICB recommended an increase in the amount of loss absorbing capital banks must hold (so they can deal with shocks without needing bailouts) to between 17 and 20% of Risk-Weighted Assets. This is considerably higher than the 7% mandated by current international agreements, like Basel III, which is due to come into effect in 2019 – the same time that the Vickers commission urges its recommendations to be implemented by.

Sir John is naturally confident in the merits of his proposals but is sceptical whether they actually are the biggest shake up for banks “in more than a century,” as BBC guru Robert Peston labelled them. “I don’t see this as more radical than Glass-Steagall,” he mentions, referring to the 1933 American Banking Act, which also aimed at separation of commercial and investment arms.

The idea that ring fencing was a compromise to total separation (completely detaching banks investment and retail arms) is untrue, he tells. “Maybe if all crises were international, and involved universal banks seizing up and therefore threatening domestic banks, total separation would be better.” But he is keen to stress a ring fence is better because if a crisis is domestic, with total separation, we have “lost the ability of the universal bank to help minimise costs to the taxpayer by using its capital to save its retail arm.”

He further denies that the date for recommended implementation, 2019, is letting the banks off easy. The commission has only made recommendations, he said. “Time is needed for government to make its position clear, and then to pass legislation, and then further time is needed to implement regulation.” He completely dismisses accusations that bank lobbying has restrained the ICB’s conclusions, arguing that “the ICB recommended what we think should happen.”

The costs of the plan, estimated by the commission at £4-7bn, have been much hyped by critics. But Sir John’s statement that “we shouldn’t let too-big-to-fail become too-delicate-to-reform” is vindicated by the fact that the crisis of 2008 reduced the net present value of GDP by as much as 60%. Indeed, there is too much at stake.Although hesitant to discuss broader fiscal issues regarding the pace of government cuts, given his sensitive position, Sir John was a signatory to the controversial letter calling for “a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-Budget report,” from which we can perhaps make our own inferences.So how does he see his overall proposals in their ability to eliminate future crises? “If you put a gun to my head, would I say there’s a 0% chance? No. But the probability and potential impact are orders of magnitude improved.”Even if his Herculean effort cannot kill the Hydra, we can only welcome a set of rigorous recommendations that would make it significantly more manageable.

Anirudh Mathur

 

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