Earlier news and comment

Waiting for Vickers (September 2011)

Lobbying by the banks against the expected recommendations from the Vickers Commission has intensified in recent weeks.   Ringfencing of retail banks has been pronounced as ‘barking mad’ by the Director General of the CBI.   The FT suggests that the banks have the ear of David Cameron, via Jeremy Heywood at No.10.   Even the noble Vince Cable, we are told, is being persuaded that reform must be taken slowly, at a time when the UK economy has weakened.

Where does the voice of average UK citizen feature in this?  Barely at the margins.  Many may feel that a four year wait to curb the excesses of the banks has been long enough. And that reforms become more urgent rather than less, at a time when a further round of bank failures and instability across Europe may be round the corner.

Meanwhile, actions in the US are proving more robust by comparison, not for the first time. 

US authorities are preparing to sue more than a dozen big banks over claims they misrepresented the quality of mortgages sold during the 2006-7 housing bubble.

The New York Times said the Federal Housing Finance Agency plans to file the lawsuit against the banks, including Bank of America, JP Morgan, Goldman Sachs and Deutsche Bank, by the end of this week. 

Why is it that all parts of the UK Government continue to defer to the power of the banking community?   Only once out of power does Alistair Darling voice the thoughts that many suspected he had at the height of the crisis, that ‘bankers were so arrogant and stupid that they might bring us down’. 

 What future for prop trading by the Banks?  (August 2011)

A piece by John Plender in the FT notes the departure from Barclays Capital if the high profile team of commodity traders previously poached from JPMorgan.

He comments:  As Paul Volcker, the former chairman of the US Federal Reserve, rightly diagnosed, the implicit taxpayer support enjoyed by banks that are too big to fail means that the big banks’ own-account gambling has enjoyed an absurd public subsidy. That was one of many encouragements before the financial crisis for excessive risk-taking by conglomerate financial giants. Mr Volcker’s perception is shared by the UK’s Independent Commission on Banking led by Sir John Vickers, although the commission’s solution to proprietary trading is to ringfence retail banking rather than prohibit the activity.

It is not yet clear whether the departure of this team is simply the result of the team’s own desire to move on to richer pickings, or a recognition by Barclays that the days of unfettered proprietary trading are numbered, as a likely result of Government action on the final recommendations of Sir John Vickers (see below).  But for customers of retail banking, it feels like a small step in the right direction.

FSA promise to investigate collapse of HBOS (July 2011)

Adair Turner, the FSA chairman has written to the Treasury Select Committee to say that the current independent review of the long-awaited RBS report, prior to publication, is ‘progressing well’ (see previous posts below).

He also sets out a proposal for the FSA to carry out a further investigation, into the collapse of HBOS.   The relevant part of his letter states:

Apart from RBS the biggest of these failures was HBOS. As with RBS, HBOS’s failure resulted in the need for significant public support, via emergency liquidity assistance, guarantees and equity injection. And HBOS’s role in the precrisis credit boom was a key element in the developments which led to the financial crisis and the macro economic harm which it has caused.

There is therefore a public interest in knowing what happened at HBOS as well as at RBS.

Not for the first time, this recognition that the public have an interest in knowing more about the causes of the 2007/8 banking crisis is long overdue.  But better late than never.

The Treasury Select Committee has been in action again (June 2011)

Two sessions were held at the end of May and in early June.  The first heard witness evidence from former members of the Monetary Policy Committee, and the second from Sir John Vickers and members of his Commission.

 The evidence from both sessions gives little reassurance to the general public that

  • events in the lead-up to the 2008 crisis have been fully understood, let alone mistakes acknowledged, within the Bank of England or Financial Services Authority
  • the new arrangements for financial stability being introduced by the Coalition Government will operate successfully, or prevent future crises.  (These changes involve abolishing the FSA and transferring its functions to the BoE and other new bodies).

Former MPC member Dr Willem Buiter was outspoken in his criticisms of these proposed new arrangements, describing them as ‘disastrously misconceived’.   There was also a further interesting exchange on the extent to which the Bank has been prepared to examine its own failings in recent years.

Q232 Jesse Norman: Thank you. Professor Buiter, you have made clear your reservations about the role of Court in the Bank of England. Did you agree with the suggestion made by Dr Wadhwani that there should be a proper investigation into different areas of under-performance by the Bank in the course of the financial crisis and beforehand?

Dr Buiter: Yes, by all the responsible parties, not just the Bank, of course. You cannot look at the Bank in isolation in this crisis. You need to look at the other regulator, the FSA, and at the role of the Treasury and at the institutions that weren’t there, like the special resolution regime, and a decent deposit insurance. That this country didn’t have a deposit insurance scheme that could dispense money within a period of six months was really quite extraordinary; so, yes, there should be a broad-ranging inquiry that should be run by this Committee, not by the Court.

Q233 Jesse Norman: The point is you feel that what I referred to as the truth and reconciliation process has not been adequately carried out so far?

Dr Buiter: It hasn’t started yet, really.

  So the public will learn a little more, but probably not a great deal.

FSA report on collapse of Royal bank of Scotland

There will be an independent review of the FSA investigation into the collapse of RBS, undertaken by Sir David Walker and Bill Knight.   It will examine whether the FSA carried out the investigation adequately, but it will not reveal the detailed sequence of events, or the actions and decisions of individuals that led to the failure.   The FSA has also advised against disclosure of their full report, through the route of publication by the Treasury Select Committee under Parliamentary privilege.

Banks and BBA admit defeat on PPI mis-selling (June 2011)

With both the Lloyds Group and Barclays deciding not to appeal the recent court decision in favour of the FSA, the Britsh Bankers Association had little choice but to follow suit.

The reason given is to ‘provide certainty for customers’.   

The thousands who were mis-sold PPI policies, and who have either reclaimed or are about to reclaim payments made to banks, must be shaking their heads in despair at the words of Bob Diamond.   His comment was  ”We don’t always get things right for our customers; when we get them wrong, we apologise and put them right. That’s our commitment to our customers, and it applies to the way in which we will deal with PPI complaints”. 

Not much of an apology after years in which the high street banks fought all the way to refute claims of mis-selling.   This one will surely be added to the growing compendium of classic statements of banker arrogance, all of which reveal the extent to which banks have lost touch with ordinary citizens.    

Robert Peston has found one senior banker who admits “It is very difficult to justify how we behaved You can’t imagine supermarkets treating their customers in the way we treated ours”.

Public trust in the the practises and behaviours of banks will take a further dive after this episode.  All the more need for some open dialogue and public challenge at a truth commission.

More hope that RBS report will surface (June 2011)

The FT reports today that Sir David Walker has been asked to arbitrate a dispute over the tone and content of the Financial Services Authority’s long-awaited report into the collapse of Royal Bank of Scotland.

The report, originally promised for March, is expected to delve into the actions of both the FSA and RBS management leading up to the 2009 government rescue of the bank. It will also include a section explaining why the regulator decided not to take disciplinary action against the bank and its leaders

Report on RBS failure still under wraps (May 2011)

The Sunday Telegraph on May 4th reported that the Financial Services Authority is to admit defeat in its efforts to publish a comprehensive report on the failure of the Royal Bank of Scotland this spring, and will announce that has called in Andrew Tyrie, the chairman of the Treasury Select Committee, to rescue the project’.   The reasons given are the fears of possible legal action in the US.  This does not bode well for full and transparent disclosure of the detailed events, and individual actions, that led to the banking crisis.   The UK public deserve better.

Response to Vickers – what the press has had to say (April 2011)

A summary of press comments, with links to relevant articles, is provided below

Will Hutton in the Observer writes, yet again, a chance to rein in the banks has been squandered.   He describes the proposed ‘soft-ring-fencing’ of retail and investment banking as ’operationally useless’ and ‘less a ring-fence, more an open border’.

Tony Jackson writing in the FT argues that the reforms (even if implemented) may prove insufficient to prevent another banking crisis.   Raising bank equity levels to 10% may be a start, he suggests, but levels double this are needed..  Equity collapses, he points out, are generally less systematically damaging than credit collapses.

Martin Kettle in the Guardian  concludes that ‘the failure to reform our banking in the public interest is a collective reprimand to us all’.  He assesses that the Commission started off by asking the right questions (‘what is banking for?’) but then blinked, averting its eye from difficult issues such as renumeration.

George Parker (FT Political Editor) on the political response to Vickers.  He judges that the Commission has shown political acumen in making recommendations welcomed by all parties, making it difficult for the banks to continue with aggressive lobbying against this set of reforms.

John Plender in the FT writes ‘The reality is that equity returns in banking since the 1980s have been at abnormally high levels – far higher than returns in the wider corporate sector that the banks exist to finance. This is partly the result of leverage, partly of milking customers in the oligopolistic areas of the business. If governments and central banks had not come to the rescue in 2008, the consequence of that leverage would have been the elimination of all the retained equity accumulated over the years and the capital inputs

Francesco Guerrera FT Finance Editor asks ‘is this it?’  He points out that Vickers and the recent Senate Committee report on Wall Street are expected to be the last in a round of regulatory investigations, following the events of 2008.  If nothing more happens, banks will be breathing sighs of relief and accelerating the trend back to business as usual.

John Kay, writing in the FT on how economists stubbornly stick to their guns

Philip Stephens in the FT argues that the banks have got away with it. ‘The commission, however, baulks at the intellectual logic of its own diagnosis. What is needed is a formal separation between retail and investment banking. Such a break-up would see taxpayers guaranteeing the socially essential parts of the industry and the gamblers obliged to wager their own money’.

FT piece on reaction at Barclays and HSBC, and extent to which there is any real risk of major UK banks carrying out their threat to move abroad.

Ben Chu in the Independent argues that the brief section in the Commission report, concluding that full separation of retail and investment banking should be dropped as a reform option, is intellectual mush

William Keegan in the Guardian views the Vickers report as all right as far as it goes.   

The New Economics Foundation and Compass have issued a joint press release welcoming the Vickers report, while warning that unless the Commission is able to consider more serious structural reforms, further bank failure is inevitable with potentially devastating consequences for the economy.

 Also a Letter in the FT from New Economics Foundation and others, pointing to the risks of the Vickers recommendations being subverted by continued lobbying from the banks.

The view taken by the Economist is that ‘the proposals are far less radical than some banks may have feared. They will probably also not cost that much to implement. Industry estimates put the cost of ringfencing at about £5 billion ($8 billion) a year, mainly because funding costs of the separate parts will rise as each will be less diversified than the whole. These estimates are probably overstated. Moreover, the real impact of the commission’s proposals is that they may help to bring about a measure of transparency and market discipline to bank funding.   Because of its reasonableness, the commission’s recommendations will be difficult to dismiss.

There is a useful analysis of the Vickers Report on the News Unspun website at http://www.newsunspun.org/article/will-the-suggestions-of-the-vickers-commision-be-taken-seriously

This rehearses an important made by nef as another critic of the report:

“More fundamental criticism has come from the New Economics Foundation, which points out that the Commission appears to say that banks use deposit to provide loans to businesses and consumers, whereas in fact banks create money as debt, out of nothing, rather than lending out real money from savers. The people on the Commission must know this, including as they do two bankers as well as Martin Wolf, the respected financial journalist.”

“This is not a minor point of detail. What follows from this is that money is mostly created by private banks, not by the government. In creating this new money, the banks add to their own wealth, because they have created a debt to themselves without actually forgoing anything or creating anything of value in the real world. As a result, they continue to extend credit, create debt, and enhance their own wealth. That is why private debt has exploded. Banks have a direct financial interest in creating more debt. This is not widely understood, and most people probably think that banks lend out real money which has been deposited with them; and also think that the money supply grows mainly because the government prints more money. Both of these assumptions are untrue.”

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