14.09.2011
Tinkering at the edges
The Vickers report confirms that it is the system itself that is bankrupt, writes Eddie Ford
To much fanfare, September 12 saw the unveiling of the 358-page report by the Independent Commission on Banking, issuing its recommendations almost three years to the day after the catastrophic Lehman Brothers collapse.
The official remit of the ICB, which was set up last year, was to examine how taxpayers could be “protected” from any future banking crises - ie, not have to bail out the banks every time they dug themselves into a hole. As we all know, the last credit crunch led to the nationalisation of Northern Rock and the part-nationalisation of the Royal Bank of Scotland and Lloyds - with the government now owning stakes of 83% and 41% respectively. The bankers mess up; we pay. Welcome to the free market of the 21st century.
Sir John Vickers, the warden of All Souls College, Oxford, who heads the ICB, has been dubbed the “competition guru”. He declared that the report was “fundamental” and “far-reaching”, despite the fact that it does not call for the break-up and separation of the banks - a demand backed by Vince Cable, for one, when he was in opposition. Not sounding quite so radical now. In fact, hype aside, even the ICB admits that in reality its proposals for reform are “deliberately composed of moderate elements” - we mustn’t terrify the bankers or the markets. The supposed ‘wealth creators’, who, of course, are nothing of the sort; rather, exploiters of productive capital.
Further diminishing its radical credentials, the Vickers report gives the bankers until 2019 to implement all the reforms - in order to coincide, or so it argues, with the international capital rule changes being introduced by the Basel Accords (agreed by the members of the Basel Committee on Banking Supervision) which - in theory - will see the setting up of risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices.[1]
Without wanting to be too cynical, one could be forgiven for thinking that such a far-off deadline will give the bankers plenty of opportunity to avoid and undermine even the relatively modest reforms outlined in the Vickers report. Especially when you consider that the changes envisaged are essentially voluntary or ‘self-regulatory’ - no big stick to beat them into line if they fail to comply with the various recommendations. Just hope that they act like gentlemen and do the decent thing.
The ICB’s main and most discussed recommendation is to “ring-fence” retail banking from ‘casino’ investment - meaning that the retail banks would be the only institutions granted permission to provide “mandated services”, like taking deposits from and making loans to individuals and small businesses. The report also says that the different arms or sections of banks should be made into “separate legal entities” with independent boards.
In this way, the ICB calculates that up to £2 trillion of assets - including all the domestic high street banking services - could find itself behind this ring-fence or “firewall”, given that that the aggregate balance sheets of the UK’s banks comes to over £6 trillion and that between one-sixth and one-third of these should be protected from investment banking operations.
As for the other significant recommendations, they include the contention that UK retail operations must hold equity capital of at least 10% of their risk-weighted assets and that the large banking groups should have primary “loss-absorbing” capacity of at least 17%-20% - including unsecured bank debt that regulators could require to bear losses (so-called ‘bail-in’ bonds) and contingent capital or ‘cocos’ (ie, contingent convertibles)[2] that can also absorb losses. The report also wants to help customers easily switch current accounts, calling for a free redirection service to be formed by September 2013.
Costs
John Vickers counselled against taking a “pick and mix” approach to the ICB’s proposals - it had to be implemented in full to be effective.
Fingers crossed, he optimistically predicted that from 2019 onwards - or whenever his proposals finally get acted upon - it would be “easier” and “less costly” to “resolve banks that get into trouble”; needlessly risky activities and operations could be closed down far quicker. Overall, he maintained, the ICB’s package will “reduce systemic risk” and the ring-fencing will “strengthen”, not weaken, the flow of credit to businesses and consumers - as, apparently, it will “insulate” UK banks from “global financial shocks” and end the need for government guarantees, thus reducing the damage to public finances.
So, yes, Vickers concluded, the new ring-fence will raise costs for banking groups, particular for those activities outside the ring-fence. But all that this does is return risk-bearing to where it rightfully belongs in an ideal capitalist world - with the investors and speculators, not the downtrodden taxpayer.
Overall then, the estimated cost to the banks of implementing the ICB’s reforms is somewhere between £4 billion and £7 billion. Vickers stated, or hoped, that the cost would be about one-tenth of 1% to ordinary retail customers, with the banks themselves absorbing some or most of the extra costs. Indeed, on the BBC’s Today programme, Vickers drew an explicit link between this estimate and the £7 billion that the fat cats of the big five high street banks actually paid themselves in bonuses last year; so, naturally, all they have to do is give up these bonuses and the reforms could be made without any increase in costs to mortgage and current account holders. And then watch the squadrons of pigs flying majestically across the sky.
Chancellor George Osborne gave his stamp of approval to the Vickers report. For him, it meant that UK banks could remain competitive, seeing how the government wants Britain and the City of London to be the “pre-eminent global centre for banking and finance” - it is businesses as usual in UK plc, almost like the good old days pre-2007. Well, maybe not. Naturally, Osborne had every intention of sticking to the report’s timetable and promised that legislation would be passed before the end of this parliament - a meaningless commitment, given that the time frame for the ICB’s recommendations takes us well beyond the next general election.
Naturally, there were discontented grumblings about the Vickers report from the usual suspects - such as the perpetually unhappy Confederation of British Industry. Predictably, and robotically, the CBI’s deputy director, Dr Neil Bentley, expressed concern that if ring-fencing went ahead then the UK would find itself “going it alone” in the big, bad world - thus “damaging businesses”, “threatening growth” and in general posing a risk to British “competitiveness”. Pull back now before it is too late. In response, Martin Wolf - ICB member and a prominent journalist for the Financial Times - described the notion that the UK should desist from introducing ring-fencing just because no other country at this time is bringing in similar measures as a “ruinous” outlook that is tacitly premised on an indefinite taxpayer subsidy to the banks.
Crisis prevention?
There was another sort of criticism: just how would the proposed reform package prevent the type of failures we saw at Lehman, Royal Bank of Scotland, HBOS, Northern Rock, etc?
The ICB had an answer. Northern Rock, for example, failed because only 23% of its funding was from retail deposits, with the majority being wholesale funding. But if the ICB’s plan had been in operation back in 2007, then liquidity reforms and more attentive supervision would have restricted significantly its ability to pursue a strategy of rapid growth financed through wholesale funding - and the ring-fence would have complemented this with wholesale funding restrictions and by requiring greater equity capital. Furthermore, the ICB imagines, macro-prudential tools would also have leant against the rapid growth in credit provision that was central to its strategy. Ditto for the RBS in the view of the ICB: ring-fencing would have “isolated” its speculative European Economic Area banking operations from its global markets activities, where most of its losses arose.
Or so the ICB and John Vickers dream. Communists tend to agree, for once, with Brendan Barber - the general secretary of the Trade Union Congress - who thought that the report was “merely tinkering around the edges”. We also think that David Fleming, Unite’s national officer, was right to be singularly unimpressed by the report - believing it effectively “kicks the overdue reform of the banking sector into the long grass” and that the ICB’s ring-fence/firewall “will not in any material way impact on the behaviour or culture at the top of the banks, where this crisis was born”.
More bluntly, the ICB’s reform proposals are pie in the sky. The world will not stand idly by until 2019 while the UK in glorious isolation gets its banking act together - we are in crisis now. Fear and panic is spreading throughout the euro zone, not dissipating, and will have near immediate and massive repercussions for the UK’s banking/financial sector.
We had another intimation of this over the last week, when the markets freaked at the suggestion by Philipp Roesler, the German minister for economic affairs, that an “orderly default” by Greece could no longer be ruled out - even that squeezing the country out of the euro zone should be considered as the “last step” to protect the project as a whole.
It did not end there. Roesler’s sentiments were endorsed by leading figures in Angela Merkel’s Christian Democratic Union and its coalition partner, the Bavarian Christian Social Union. Inevitably, the markets plunged and in the bond markets the yield on 10-year Greek debt hit a new record high of 25% in trading - making the country’s debt situation even more impossible than it was before. What next?
Alarmed, Merkel hit out at any ‘defeatist’ talk of a Greek default - orderly, disorderly, chaotically or otherwise. Without specifically mentioning Roesler, the German chancellor urged her coalition partners to exercise “great caution” in voicing their views on Greece and to be aware of the “consequences” of loose talk. If not, she asserted, they could be “be putting the euro zone in a grave situation” - perhaps even leading the euro to its death.
The internal spat over the handling of the Greek debt crisis comes as Merkel has been trying to mobilise support from her coalition partners for a crucial parliamentary vote at the end of this month on expanding the European Financial Stability Facility’s bail-out powers and, critically, its funds. And the vote is looking close - very close. Several MPs of her ruling coalition have threatened to vote against a bill endorsing the July 21 decision by the euro zone leaders to beef up the EFSF mechanism. Last week a trial vote showed that the coalition was still short of more than 20 votes from its own ranks for the bill to pass and if the same happens during the upcoming vote in the Bundestag, the government will be forced to step down and call a re-election two years before its current term expires. Potentially throwing the euro zone into even greater crisis.
If things did not look bad enough, Italy is slipping deeper into debt and crisis. Holding another auction, the government raised €3.85 billion in five-year bonds - Italy has about €1.9 trillion of debt and must raise about €70 billion by the end of the year to sustain itself. But the yields on its debt reached another record high of 5.6%. Running faster and faster to stand still, until there is no option but to stagger backwards. Showing the desperation of Italy’s plight, it seems that the Italian finance ministry has met delegates from China’s largest sovereign wealth fund, China Investment Corp.
It is understood that Giulio Tremonti, minister of economics and finance, asked the Chinese delegation to consider buying Italy’s sovereign debt and making “strategic” investments in Italian companies. In return, senior Chinese official Wu Xiaoling said on September 13 that Beijing was ready to work with Europe to “boost” market confidence - going on to make reassuring noises about how the Chinese government will “continue to support Europe’s measures in maintaining a stable euro”.
With or without the euro, inside or outside the euro zone, the European ruling class wants to make the working class pay for the crisis. Clearly, at the very least a continent-wide fightback is required - one struggle, one fight. We in the CPGB will do everything we can to build this resistance movement through the creation of EU-wide organisations of our class. Only if the proletariat is able to challenge for power across the continent will we have a hope of ending the chaotic rule of the market and opening up the possibility of a new world order.
Notes