John Vickers, the head of the Independent Commission on Banking, recommended tough regulations for British banks under reforms outlined by his group. Andrew Winning / Reuters
John Vickers, the head of the Independent Commission on Banking, recommended tough regulations for British banks under reforms outlined by his group. Andrew Winning / Reuters

Lack of urgency means UK bank reform policy will be no crackerjack



What a damp squib the Vickers Report into British banking has turned out to be.

The UK government has pledged to reform the banks to ensure no repeat of the 2008 financial crisis, or at least of the £65 billion (Dh376.95bn) bailout of the banks that followed.

The main recommendations of the report - that UK banks must ring-fence their risky investment banking activities from their core operations lending to small businesses and households - was trailed heavily over the summer. But what has really taken the sting out of the tail of the economist Sir John Vickers' suggestions is that the banks have eight years to put their houses in order.

You can be sympathetic to the argument that forcing change on banks right now could be detrimental to the UK's urgent need to stimulate economic growth. But allowing eight years for the regulations to come into play is little more than paying lip-service to the need for reform.

You only have to look at how bank shares performed on the day the Independent Commission on Banking's proposals were published to realise the market was not that bothered by all the fuss. On the day European bank shares were battered, shares in Lloyds, Royal Bank of Scotland, HSBC and Barclays - the UK's four heavyweights - barely moved.

In eight years' time, the economic cycle could have shifted dramatically. Who knows? If things are going well in the City, the banks could argue the reforms are unnecessary. It's entirely possible a new political party could be in power - perhaps one not steadied by Liberal Democrat coalition partners - and the outrage the public feels, three years on from the collapse of Lehman Brothers, may finally have dissipated.

The UK has decided it will take the lead on banking reform across the globe. Hence the commission's decision to propose much stricter capital ratios on UK banks than will be allowed under new international banking rules.

There are solid reasons for this. UK banks really are too big to fail. Financial sector assets in relation to GDP are much higher here than in most other countries, including the US, Japan, France, Germany and Spain. UK banks' assets are more than 500 per cent of UK GDP. Only Iceland, Ireland and Switzerland are in a similar situation.

The proposed ring fence will certainly make it easier to avoid another huge bailout. But it can not shield UK banks from a crisis abroad, whether in sub-prime markets or the euro zone. And, as is often noted, the UK banks that were in the deepest trouble - HBOS and Northern Rock - were not attached to investment banks. Nor did Lehmans, a stand-alone investment bank, have retail customers.

Allowing the banks so much time to put these reforms in place, while at the same time exacting a much tougher capital framework from the UK businesses, will merely make the banks vulnerable to foreign predators. It may seem unlikely at the moment, when the euro zone's behemoths are staring down the barrel of the sovereign debt crisis, but it could take considerably less than eight years for any of the giant banks of France, Spain or Switzerland to get back on their feet and come trophy hunting among the weakened UK groups.

Equally, the takeover threat may come, as it has for many infrastructure groups and utilities, from Asian or Middle Eastern sovereign wealth funds.

Banking should be boring. It ought to be a utility business, with one of the few differentiators being the way it treats its customers.

British banks have failed on both counts.Sir John and his commission have tried too hard to be fair to both sides.

They know more than half of the population, according to a recent poll of 1,000 people, want to see action taken against the banks. So they have put forward a regulatory solution that certainly disadvantages the UK banks against their foreign competitors.

But the commission's ultimate goals of making the banking system safer, preventing huge bailouts and improving the service given to customers may never be attained. If the UK government wants to take the plaudits for cutting banking back down to size, it's now or never.

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