Vickers Report – A damp squib!

Vickers Report – A damp squib!

The newly announced Vickers report on UK bank reform is to Banking, what increased airport security is to 9/11!

Having read the Vickers Report we see nothing dealing with the root causes of the bank crisis such as bad management, bad credit or bad regulation. We only see a bunch of pundits who have never made a loan, parade themselves on morning TV. Nothing good (or bad actually) will come out of this proposed change which is nothing but a revisit to the US Investment Act of 1933 which was passed into law to punish banks after the 1929 crisis.

Money is fungible and bad judgment does not recognize corporate ring-fencing. Examples such as Northern Rock or Lehman Brothers are obvious facts which deny the ICB any proof for their proposed changes would have prevented 2008’s banking collapse.

The Vickers Report barely touches on technology (the word only first appears on page 175 of the 363 page report and then at four more occasions when discussing barriers to entry into the UK retail banking market. Unsurprisingly outsourcing is not mentioned a single time and operations are clearly not in focus. In short the Vickers report is about rules, not facts and behavior.

While liquidity is addressed it is mostly in a Basel III context while what we see as the key issues between now and 2019 are just not even brushed on:

1. Judgment (as in good judgment not the Court version): not a single mention. How come credit and liquidity judgment are not encouraged? Have we brought the boards of Northern Rock, Lloyds or RBS in front of our courts? Why the impunity? Is booking mortgages at 1.25X loan to value something which requires a law or just proper active governance.

2. Credit Experience: to our complete dismay we have seen bank credit experience disappear almost entirely during the last 20 years. Banks have outsourced judgment to models and data providers and today a typical branch manager has neither the authority nor the competence to decide what a “good loan” is. Things are not better at HQ. We believe that the UK and the EU should start a program of certifying credit skills and imposing that each branch has at least one such certified person.

3. Technology: we know enough about banking applications to be able to state that this is where most banks are weakest. Legacy applications are no longer properly maintained, controlled and documented but are used at the very core of the retail banking industry. We have not seen regulators pay enough attention to the reality of the back offices.

In conclusion, what is needed is good reliable banking and for that we need retails banks with the desire and the capability to open accounts, move money, extend credit with the proper care and judgment. On the investment banking side the banks obviously need the right amount of capital for the risks they take but thinking that the game is about the right corporate structure, packaging risk and selling it is not enough. Judgment must begin with bank boards.

Asking members what they really know about banking would be a good start!

Posted in Regulation Comments: 3 comments


3 Responses to Vickers Report – A damp squib!

  1. JFL says:

    I would largely agree on the comments made. Banks are sinners and are punished by bright and candid minds who know little about banking, its dynamics and constraints.

    The nagging question though is whether banks will be able to keep financing the economy : more capital added on capital, a regulatory environment which is pro cyclical, all this means that investing in a bank is quickly becoming the most stupid bet in town (notwithstanding mighty Warren who endeavors to save the US Banking industry and his soul).

    The bigger the bank the heavier the constraints. Too big to play… How long for over-indebted States to have to replace disgusted private shareholders? Let’s see what happen to Socgen….

    My only disagreement is therefore on your title the “damp sqib”. It is more serious than that. Regulators and politics are in a way like a a man who would be digging, digging under his house to make sure its foundations are safe. Guess what happen….

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  3. GIUSruTA says:

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