Bankers Get Off Scot-Free in Industry Overhaul: Matthew Lynn
Everything you needed to know about the long-awaited report of the U.K.’s Independent Commission on Banking was summed up in a few share prices yesterday.
Barclays Plc (BARC) and Royal Bank of Scotland Group Plc (RBS) surged after details on overhauling the finance industry were released.
Split up the banks? Shut them down? Make them move elsewhere? No. The commission came up with some irrelevant, complex and hard-to-enforce rules aimed at raising capital ratios and separating their retail from investment arms.
In effect, the banks got off scot-free. The British economy and the nation’s taxpayers will be the big losers.
John Vickers, the former Bank of England chief economist who was chairman of the commission, has failed to live up to the scale of the task he was assigned. Like the Dodd-Frank Act in the U.S., there will be lots of new rules and regulations, but the basic structure of the industry will remain the same -- and so very little will really change.
The commission was created by the government to study ways of making the financial system safer. Its most urgent task was to ensure the collapses suffered by the U.K. and other countries during the credit crunch could never be repeated.
The task was a big one. Britain is a relatively small country that happens to be home to some very big banks. Take Barclays, for example. Its balance sheet is roughly the same size as the entire gross domestic product of the U.K., according to a March 29 research note from UBS AG. By comparison, JPMorgan Chase & Co has a balance sheet that is equivalent to 24 percent of U.S. GDP, according to UBS.
Ruined by Banks
There is a question mark over whether it makes any sense for Britain to carry on hosting financial institutions of that scale. If they collapse, they could bankrupt the nation -- just as Iceland and Ireland have been ruined by their banks.
The answer the commission has come up with is inadequate. That isn’t to say it hasn’t made some sensible suggestions. It will force Lloyds Banking Group Plc (LLOY), which merged with HBOS Plc at the height of the financial crisis, to sell a lot more branches, over and above the 600 it already has to get rid of to comply with a European Union ruling. That will introduce a bit more competition into the financial-services market, and allow space for new players to enter the industry.
It will force the U.K. banks to have Tier 1 capital levels of about 10 percent, higher than many of their foreign rivals. They will have to put in place plans for an orderly bankruptcy, and separate their consumer units, so that, in theory anyway, the collapse of their investment-banking arms needn’t threaten ordinary savers and depositors.
No Change
The trouble is, you have to be living on another planet to think any of that will change much. And it is impossible to believe it will be enough to stop another 2008-style collapse.
First, too little competition wasn’t the issue. One of the consequences of the credit crunch was that mergers designed to prop up collapsing banks made the U.K. savings and mortgage markets less open. Banks disappeared into rivals. Consumers will suffer from that. It needs to be fixed. But no one can believe that in 2008 the U.K. finance industry wasn’t competitive enough. They were handing out mortgages to people’s dogs. More players vying for business won’t make lenders become more responsible. If anything it will make them less so.
Second, raising capital ratios is only part of the answer. True, the more capital a bank has, the better it will be able to withstand financial shocks. And yet, there is little evidence that not having enough capital caused the credit crunch. It was the complexity of financial instruments, the bonus system and the reckless expansion of banks into markets they didn’t understand and couldn’t control that led to the crash. More capital will mitigate some risks, but it won’t abolish them.
Blurred Divide
Third, nobody believes in “ring-fencing” bank units. Will it really be possible to create a structure at RBS or Barclays that allows the investment arm to fail without damaging the whole bank? Are the regulators smart enough to make sure that is enforced, or will some clever bankers find ways to blur the divide?
Vickers should have created a clean split between investment and retail banking. The retail banks would be properly regulated and protected by the government. The investment banks would raise their own capital, and be responsible only to their shareholders. That way they can take as many risks as they like on products of mind-boggling complexity. If they make a packet, great. If they lose their shirts, it isn’t a problem for anyone other than their staff.
If Barclays or HSBC decide they don’t like that, they would be welcome to move their headquarters elsewhere. Both banks are probably too big for Britain. The country would be better off without them.
The U.K. had a rare opportunity to fix its overblown finance industry. Vickers and his commission failed. With luck, the worst will never happen. But if Britain ever suffers an Icelandic or Irish meltdown, we will know who to blame.
(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a book on the Greek debt crisis. The opinions expressed are his own.)
To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
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