The Vickers report: just do it!

The final report of the UK's Independent Commission on Banking, the Vickers Commission, has been published today. It contains no major changes from the interim report that appeared earlier this year. The banks will be required to separate ("ring fence" is the favoured term) their retail operations from their investment banks, and to provide extra capital for them. The goal is to ensure that in any future financial crisis, the retail arms can be saved without imposing massive costs on taxpayers, while the investment banks have to fend for themselves. George Osborne has already pledged that the government will move to enact the proposals in full.

I've written several times on this blog in support of this kind of separation, so rather than rehashing all the arguments again now, I'll stick to just a few observations.

One minor surprise is that Vickers suggests that the reforms not be fully implemented until 2019, four years later than most experts had predicted. This has already led to suggestions that the government (or at least the Tories) still want to go easy on the banks. However, there is at least some logic for the later date: 2019 is also the proposed start date for the Basel III capital requirements, which will apply to banks worldwide. It's certainly arguable that the lead-in time for Basel III could and should have been much shorter, but on the basis that the date is set in stone, it makes sense for the UK changes to coincide with it.

Vickers estimates that the cost of his proposals to the banks -- which basically reflects the removal of the current implicit government guarantee against failure -- will be £4-7 billion per year, compared to earlier estimates of £10 billion. A surprising number of media commentators seem reluctant to impose these costs on the banks, even though they are a fraction of the costs that taxpayers were forced to bear not so long ago. In typically forthright fashion, Chris Dillow points out that the higher costs for the banks are "not a bug, but a feature" of the Vickers report -- see his blog on the subject here.

The Lex column in the FT opines that the banks will find it hard to oppose the Vickers proposals, but that probably won't stop them trying. One likely line of criticism is that the UK should not be "going it alone" in this way. This simply won't wash. Bank assets are so much larger in relation to GDP in the UK than in any other country, thanks to London's prized role as a financial centre, that regulators really have no choice but to adopt a belt-and-braces approach. And in any case, how long will the UK be alone in taking this approach? Any day now, France and Germany may have to recapitalise their banks to deal with the effects of a Greek debt default. It's surely inevitable that the trade-off for that taxpayer support will be tighter regulation in those countries too.