Banking Commission: Basel not enough to make banks safe
I took seven things away from the speech today by John Vickers, the chairman of the Independent Banking Commission that has been asked by the chancellor to advise him on how to make the banking system safer and how to improve competition between banks.
First, the commission has already concluded that the new international rules known as Basel lll to force banks to hold more capital and liquid resources, and lengthen the maturity of their debt, do not go far enough.
He has signalled that the commission does not believe that for what are known as systemically important banks - huge banks such as Barclays, HSBC and Royal Bank of Scotland - the new 7% Basel minimum ratio of equity capital to assets (loans and investments) would adequately reduce the risk of taxpayers again bailing out big banks in future crises.
This will trouble the likes of Barclays and RBS, because almost anything that the Commission does ultimately recommend to make them safer would reduce their profitability (at least in the short term).
Second, the commission - like the Bank of England - is persuaded that it is profoundly unhealthy that the biggest banks, especially those engaged in retail banking, are able to raise money more cheaply because of creditors' perception that the state will always rescue them as and when they run into difficulties.
This is how Vickers puts it:
"Systemically important institutions now have an implicit guarantee for risk taking activities, particularly those related to and/or inseparable from retail banking. The distortion, which is also a distortion to competition with other institutions, should be neutralised or contained."
Third, the central task for the Commission is to propose reforms that would heap all the costs of a banking failure on to creditors and investors, while avoiding any serious disruption in the transmission of money, savers' access to deposits and the provision of credit to households and small businesses.
Fourth, the more extreme versions of so-called narrow banking, in which banks that look after our deposits would be banned from lending our cash to businesses or individuals, would impose excessive costs on the economy.
This will disappoint the campaigners for more radical banking reform, who are convinced that the current basic structure of banking - called fractional reserve banking, in which short term deposits are 'transformed' into long-term loans - is flawed.
Fifth, the tax system, which makes it cheaper for all companies to fund themselves with debt rather than loss-absorbing equity - because of the deductibility of interest - is at the heart of the problem, because it provides a powerful incentive to banks to minimize their holdings of equity.
Sixth, the Commission is highly sceptical of the arguments of universal banks - those like RBS, Barclays and HSBC which combine retail banking and investment banking - that they are intrinsically safer than banks that are more specialized.
Seventh, the proposed solution to all of this looks as though it will involve significantly higher capital requirements for systemically important banks (which might well include a huge retail bank such as Lloyds), so that they are better able to absorb losses.
And although it is fairly clear that the Commission would quite like to see some kind of separation of retail banking and investment banking (not necessarily full and formal bifurcation or demerger, but perhaps putting the distinct activities into separate subsidiaries that would have their own capital and would be capable of being physically carved out in a crisis), what is less obvious is whether it wants such separation to be effected by legislative fiat or encouraged through capital surcharges on those banks which choose to remain huge and universal.
Finally some of you may think none of this is sufficiently bold. But the big banks will view it, rightly, as a threat to the ability of their investment banking arms to generate huge profits. And they will fight hard to prevent the ideas of Vickers and co becoming - for them - a painful, bonus-squeezing reality.
And another thing. It is proving immensely difficult for the Treasury to reach agreement with the UK's four biggest banks on new commitments to lend to small business, support a new so-called Big Society Bank and declare that they have moderated their bonus payments (a bit).
As a result there won't be an announcement on all this deal - which goes by the moniker of Project Merlin - early next week, which is what was expected.
Sources tell me that there is "still a way to go, on lending in particular". So talks will continue over the coming weeks.
Apparently the snafu is to do with "company governance", whatever that means. But bankers seem to think a deal is more likely than not, in the end.
All a bit odd, since you'd think RBS, Barclays, HSBC and Lloyds would all be desperate to show that they're doing their bit to support small businesses and economic recovery - and take some of the sting out of the widespread criticism of the substantial bonuses they are set to pay.
Also one banker told me that George Osborne apparently does not want his first punch up with the new shadow Chancellor, Ed Balls, to be over why there is no promise to reduce bonuses to any substantial extent.
"HMG does not want to give Balls a platform against Osborne next week", the banker said.
Which means that the Treasury isn't particularly upset - or so I am told - that it is taking a bit longer than expected for the banks to ensure that the deal isn't in breach of their responsibilities to shareholders.
A source close to the Chancellor says that the banker I quoted above got it wrong on George Osborne's supposed lack of desire to have a scrap with Ed Balls on the banks.
The source said: "This would be a great issue on which to take Balls on, especially as he was City minister at the height of the boom...The reason for delay is that we're not satisfied we have a good enough deal. You'd expect us to drive a hard bargain for taxpayers.
"This would be a good opportunity to remind Balls that he designed the tripartite (regulatory) system that failed so badly and ended up with us owning these banks."
I have to say, direct hostilities between Osborne and Balls - as and when they start for real - should be quite a spectator sport.