Tuesday 12 April 2011

Does Vickers Commission Interim Report change the conversation?

So the Independent Commission on Banking has provided an answer to one of the big questions raised by the financial crisis. We can't stop a repeat but we can mitigate its impact.

Despite the predictable sound and fury around the Interim Report from the ICB, the big banks seem to have won the argument for resisting a break up. The Commission's structural approach is to inject more competition into the high street banking sector, ring-fence retail from investment operations, and make the cost of capital more realistic.

Intriguingly, these changes may have significant effects on banks' culture although this is not explicitly mentioned by Vickers.

  • Greater high street competition will drive transparency on fees, simplicity in products, and improved customer service
  • Ring-fencing the retail operations, even if some cross-subsidisation remains, will help the high street side push back against the higher risk-takers from the investment side
  • More market-rate capital will undermine the 'fingers-in-the-till' mentality of the investment side using the retail side as a source of cheap credit
Unless George Osborne perpetrates an even larger Government U-turn than tuition fees, most of the Vickers recommendations will ultimately change the governance culture of the banking sector. Whether this is for the better depends on the small print, as ever. However, Vickers seems like the tentative beginnings of a new conversation for UK Banking. Should we tell the cheering bankers that they aren't out of the woods yet?

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