U.K. banks need to insulate their retail operations from risky investment-banking activities to guard against economic panics, said John Vickers, chairman of the country’s Independent Commission on Banking.
“Banking is risky,” Vickers said today on a panel hosted by New York University’s Stern School of Business. Those risks “should sit with investors, not the taxpayers. Nor should they sit with retail depositors,” he said.
Britain’s Chancellor of the Exchequer George Osborne has pledged to implement by 2019 recommendations published last week by the ICB. The proposals are aimed at shielding customers and taxpayers from another financial crisis. The plans, also known as ring fencing, could cost the industry as much 7 billion pounds ($11 billion).
“Ring-fencing retains many of the synergies of a broad banking group, while providing insulation for vital economic functions,” said Vickers, 53, a former chief economist for the Bank of England. He also said his proposal will not impede economic recovery.
U.K. investment banks face a ratings cut if the ICB proposal that lenders insulate their consumer units is implemented, Standard & Poor’s said Sept. 14.
Barclays Plc, Royal Bank of Scotland Group Plc and HSBC Holdings Plc will be most affected by the plan because their U.K. businesses would fall on different sides of the fence, S&P said.
Vickers said he didn’t reconsider his proposal or add more safeguards when he heard about UBS AG’s $2.3 billion loss from unauthorized trading last week.
“We’ve gone exactly far enough,” he said. “That activity would have been over the fence, not in the fence.”
Jes Staley, who runs JPMorgan Chase & Co.’s investment bank and also spoke on the panel, said he prefers Vickers’ proposal to U.S. regulations that prohibit banks from using their own money to trade. Staley said he doesn’t believe that the New York-based bank is too big to fail without disrupting global markets.
“I absolutely think the FDIC could take over JPMorgan tonight” if need be, Staley said. JPMorgan, with $2.25 trillion in assets, is the second-largest U.S. bank behind Bank of America Corp.