Friday, 13 July 2012

Implementing the Vicker's report

Britain’s prosperity and morality are tied up with banking reform

Mansion House, in the heart of the city of London, is located a stone’s throw away from the Bank of England. Together on bank junction, these grandiose Victorian edifices, overlooked by tall glass offices, provide the passing pedestrian with an insight into Britain’s past as banker to the world, and future, as home to global banking.

At least this was the view up until recently. The aftermath of the financial crisis has left banks asking whether it still makes sense to be in Britain, and the British electorate asking whether they still want them there.

At a cross roads in more ways than one
The changing mood was apparent in the chancellor’s annual speech at that historical emblem of capitalism, Mansion house. Instead of congratulating the city, as was common up until 2008, the Chancellor took the speech as an opportunity to describe how risks taken in the capital, “spilled out onto the high street, putting taxpayers at risk”. Osborne went on to advocate the government’s whitepaper on banking reform, largely based on a blueprint put forward by Sir John Vickers, as the solution to grumblings over banks.   

The reaction to the government’s white paper emphasizes the gravity of the reforms. Some argued that they don’t go far enough leaving Britain vulnerable to another crisis; others insisted that they would hamper an already stuttering economy and extinguish the city.

As is often the case in finance, the outcome of policies may not fit well with original predictions. Those calling for investment banking to be ring-fenced seem to follow a sensible logic that we should separate, ‘casinos from retail’. Yet those banks which first ran into trouble, turned out to be in rather dull areas of retail banking. Northern Rock and Bradford and Bingley operated in a world a million miles from collateralised debt obligations and credit default swaps.

The frustrating and frightening truth is that no one is entirely sure what the solution is. Economists talk omnisciently for the implementation of ‘obvious’ reforms. Yet, such calls were not made when it mattered. Furthermore, each crisis is unique, and the regulation of one area often pushes the shady aspects of finance elsewhere, rather than removing it.

Britain is a special case, as the chancellor outlined, the country faces a “British dilemma” where trying to “protect taxpayers and being home to global banks” often runs in contrast to one another. As a country which depends heavily on finance for its prosperity, getting the balance between sensible reforms and satisfying the electorates’ calls for stringent changes, will undoubtedly prove a thankless task.

The implicit subsidy which has allowed unscrupulous bankers to gain large bonuses, while the wider economy flounders, riles the average Brit like nothing else. Banking reform is more than a question of efficiency. Doubts have been raised over the culture and morality of the industry. Cynics reckon increased regulation will merely lead to more box ticking and fat fees for city solicitors.

This may well turn out to be the case, either way, the government should tread carefully. Public opinion is fickle; the chancellor can incur the wrath of the public now and still recover in time for a May 2015 general election. Britain’s role as a hub for banks is more fragile than many realise. While drastic reforms will be a popular move amongst red tops and the general electorate, future historians may well take a dimmer view, seeing draconian reforms as the beginning of the end for London’s status as the hub of global business. 

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