UK Banking Commission Report

The Vickers report is directly relevant for Ireland in view of the inter-connections between the Irish and UK banking systems, while also providing some guidance for possible future reform strategies across Europe.

The FT editorial provides a useful overview (it also highlights the proposal to rank depositors ahead of senior bond holders), while the full report is here.

24 replies on “UK Banking Commission Report”

Interesting that it is expected it will take 8 years to implement these reforms (3 years into the mess) when it probably took fewer than 8 days for £50 billion of UK citizens’ money to be allocated to shore up the banks. The hint of residual Imperial hubris is touchingly poignant when the writ of the British Government doesn’t run fully on the mainland (and probably less in assorted, small and scattered territories) and trans-national banks (and the shadow banking system) hold all the aces in the game of poker with national governments.

Still, I suppose, it lays down a marker that others might follow. But I don’t see it gaining much traction with the big emerging economies in the G20 – the only forum in which these predators might be beaten back.

The principle of separating retail and investment banking (which I would define as retail and wholesale) is sound, but what is being proposed will be gamed into irrelevance by the banks. Sir John Vickers and his colleagues remain trapped in the mindset that retail competition between vertically integrated behemoths (even with this easily gamed ring-fencing) will impose market discipline and generate benefits for the ordinary bank customers and small businesses. The big predators will concede some small amount of market share quite cheerfully to a few new entrant minnows to maintain the optical illusion of retail competition so as to keep the UK and EU financial regulation and competition authorities off their backs.

There is no recognition that there are two distinct markets and two distinct sets of banking services – a wholesale market for investment banking services and a retail market for banking services for the majority of ordinary citizens and small businessses that have signifciant utility features. Full-blooded competition subject to effective regulation and transparency is required for the former to function efficiently and effectively; but limited competition, the building of strong, long-term franchises, quasi-judicial regulation and the effective representation of the collective interests of consumers are required for the latter.

These ring-fencing and capital bossting proposals don’t even scratch the surface of what is required.

These reforms aren’t due to be implemented until 2019. With the amount of whittling the bank lobbyists will do to them in the interim, they may as well not be implemented at all.

This isn’t banking reform; it is banking appeasement. Once again, the banks have been treated with the very softest of kid gloves by the British government–not that is is the only government doing this. I cannot think of any parallels for such preferential treatment by a government, with the exception of the treatment of established churches.

They are not even separating the retail and investment banks; they are “ring-fencing” them. I expect the fences to be suitably low enough to allow all the skittish young alpha gerbils, with their money and schemes, to hop to and fro between the sections. Lehman’s II, here we come.

One of the outcomes of this expensive report is that the banks will be required to hold more capital and issue more loss absorbing debt instruments. So cost of funding goes up and returns to shareholders go down.

The banks will not be able to raise private capital due to the low returns they generate & it is not obvious who wants to buy bail in bonds so they will deleverage or in plain English ration credit to SMEs and house buyers.

Conclusion, access to credit goes down, cost of credit goes up. Economic growth goes lower. About the only positve outcome is that renumeration goes down.



You raise the most obvious issue but somehow seems lost in most new ‘regulations’.

Simply put why would an investor join the banking financing queue today for the prospect nay the guarantee of lower returns into the future when better paying risk adjusted alternatives are available elsewhere?

There is an implict assumption by Regulators and Basel III fans that investors will sheep like fund these institutions to the levels required and at the same time assume lower returns for argubly equivalent risks. Think again.

The belief currently touted is that higher banking capital levels automatically means lower risk. This is utter nonsense. Why? Simply put an operating loss on a large amount of capital is still a LOSS on capital – losses do not entice investors to the financing table regardless of capital size.

I have been in the bond/financing game long enough to know this basic capitalist rule.

What entices investors is the prospect of growth and positive returns which they can see spanning into the future and can gain serious comfort over. Capital levels are always secondary. If there was ever proof of what I’m saying stands to reason – I suggest readers look to the performance of AIB today. Given the recap its expected Tier 1 is now c20% – nearly 5 times the previous minimum and yet buyers of the equity or Tier 1 bonds are like hens teeth. Investors couldn’t give a monkeys about the size of the capital base its the prospect of growth and only growth which matters in utterly cyclical businesses such as banks.

Growth for banks is based on the cycle and the capital base should be based on the same principles. What we didn’t do during the boom years was to insist that the only metric that matters longer term to banks i.e. its Loans to deposit ratios were kept at 100%. Keeping the LTDR at that level is the most natural internal risk hedge for any bank. ALL capital based rules are inferior particularly ones that try to be counter cyclical when the banks are dead in the field and are relying on the goodness of others to revitalise them. Dream on.

This part of the world needs no less then a new Henry 1 to put the banks in their place.
It will not happen anytime soon – they have much more mischief planned and profits to steal.

I’m getting annoyed at how much various proposals recently ignore the cause of the recent crises, which were:

1) Inefficient markets for various debt instruments and their associated derivatives

2) Asset bubbles (property) and associated undue risk taking

The solutions are simple:

1) Markets:
Efficient trading and clearing venues are needed. The clearing venues should be fully transparent on pricing, volumes and even perhaps a unique identifier per bond unit and counterparties(say after a 30 day wait). This would assist asset tracing/counterparty risk.

The trading venue(s) should be fully neutral (i.e. anonymous bid system etc) and also steps should be taken to ensure good volume/liquidity. An idea would be to require there be a B class of every issue, being 10% of that issue. This issue should be sold by open auction on the secondary market every year, staggered with 2.5% each quarter. That would ensure adequate liquidity for mark to market etc.

2) Bubbles
Independent directors need to improve
Bonuses need to be paid over 5 years
Regulators need to intervene, and attach counter cyclical tarrifs to credit for specific regions/asset classes. These tarrifs could be either more regulatory capital for associated loans, or directly on interest rates for associated sectors.

also see this interesting Vox article:

Too complicated and open to corruption – Byzantine rules based on a Byzantine foundation will not be a stable construct.
Destroy banks ability to make credit – that should do it.

Impressive set of reforms. Pressure and attention should now move to France and Germany to see that they take similar action.

Insisting on reforms in peripheral countries would likely be more palatable if core countries were willing to acknowledge the role that their financial systems played in the debacle by implementing meaningful reforms such as these, to their financial systems.

Talk of financial transactions taxes ought to be viewed as a distraction in comparison to these types of measures


Clearly, if banks must now fund themselves by raising a higher proprtion of funding that is not implicitly guaranteed their cost of funding is likely to increase.

But surely, surely, surely, the crisis has taught us the lesson that private losses, particularly in large financial institutions, must be borne by investors in those institutions.

White Smoke drifting over Vesuvius …. EZ banks not even talking, let alone lending, to each other …

Keep those Promissory Notes ready to hand to toss into the FIRE …. burn, Burn, BURN … let those flames grow higher ….

When Vichy is falling – who is next?

2019! Get a life. Tomorrow 5 o clock more like it …. maybe even today.

You should enjoy this article from FOFOA (pro BIS writer) – the Vichy banks as you call them want to destroy all politics & diversity for the greater Glory of Mammon.

The true role of Gold which is to balance external trade BETWEEN NATIONS and not banks has been utterly corrupted by the fractional reserve system.
This has removed Princes from all executive control in Europe and these men have been replaced by dark predatory banking sects.
The Venetian banks want everything – this will not end well me thinks.

I say bring back tally sticks to pay all taxes and let the kings settle their differences with Gold thus starving the bankers.

“Conclusion, access to credit goes down, cost of credit goes up. Economic growth goes lower. About the only positive outcome is that renumeration goes down.”

You have to look at the whole picture. Say banking is an incredibly fast machine that emits massive numbers of tiny particles with effects similar to asbestos the faster it goes.

How much has banking cost Irish society over the last 5 years in the form of the asbestos?

Will the asbestos costs be reduced under the proposed new system?

No argument with you about where losses should reside- the providers of risk capital. However, these reforms will lower the returns for equity providers and increase the risk in some cases. For bond investors there is increased risk of bail ins. Now this is good. However the cost of bank capital is going to go up and I venture the supply goes down.
I conclude therefore credit gets scarcer and more expensive. Some will welcome this, some won’t.


In relation to deposits, placing them senior to bondholders could lower the rate of interest on them and make the bank less prone to runs

For sure higher levels of equity ratios will reduce return on equity percentage wise. However the return should also be less risky.

In relation to bond financing, which would now all be subordinated to deposits and not implicitly guaranteed the price would probably rise.

In relation to the general amount of credit supplied in the economy, would the cost of capital to banks not be only one factor among many that would effect this, others being monetary policy

Economically and practically senior bonds and deposits are the same thing, sometimes ‘certificates of deposit’ for very high nominals are issued.

Trying to artificially make one senior to the other dodges the problem. The problem is that risk capital was not adequate for risks taken. Risk capital requirements should not be flat per bank, rather dynamically calculated according to the bank’s sectoral lending risk.

Vickers report is silly stuff.


Explain why the returns should be less risky?

Returns to a bank are largely dependant on the economic cycle and the nature of the wider dirvers in the economy – the method and cost of its funding has an impact for sure but very much secondary in the round.
Perhaps you see it differently.

or a thread on this – is the site suffering Nama fatigue?
“Nama offered deal to allow developer’s wife to keep €7m”

@Desmond – I don’t understand your point here about seniors and depositors being “Economically and practically” the same.
And weren’t they always treated diferently anyway since there was always a limited but substantial deposit insurance which didn’t extend to senior bondholders. The “implicit” guarantee was a revelation to most people outside banking circles and is still a mystery. The retention and enforcement of that “status quo” would have sufficed for that aspect of the report. @ObsessiveMathsFreak I agree the “ringfencing” sounds like nonsense – it should however make life more interesting for the designers of open plan offices, and the “Chinese walls” manufacturers can broaden their product portfolio.

@ yields or bust
The returns would be less risky on equity because there is more equity, i.e., less leverage. Any given swing will have a less pronounced effect

@Desmond Brennan

While the distinction between a bond and a large deposit may be a little arbitrary the essential difference is the term limit. This distinguishes between funding that is prone to a run and that which isn’t
. It also separates the liquidity or maturity transformation function of the bank from other functions

But banks are the ultimate cyclicals…they are our blessing and our curse….regulators are trying to force capital raising, when many potential investors suspect that the losses haven’t peaked, so why would any rational person offer up their capital for certain loss? And why would anyone give capital to absorb past losses (losses already lurking underneath)?

I fear the posts regarding regulatory capture are correct. The vampire squid banks played a blinder. they passed the losses parcel fast when the crisis came in 2008 before the clueless, overpaid, suckers at the table (the regulators, economists and politicians) had any clue what was happening. Now these stooges are against the wall, they find that the fast talkers are nowhere to be found.

maybe a new king Henry 1 or even VII is needed, but I doubt we will find one until the collapse comes. The neo liberal ass kissers, who dont even understand the very function of money but fully comprehend the nature of sliming your way to the expense account, won’t be beaten with politics and bureaucratic process. They have to be rooted out like cockroaches, with repeated and comprehensive measures to destroy their Eco system. That takes time, but luckily, their own inventions do the work of the exterminator. Our job is to sit back, accept that we will be poorer in future, and then enjoy the movie.


No incorrect the ability to generate returns would not be less risky but the rate of returns on capital would be lower.

You’re misundersting the nature of the capital base – its not going to make one iota difference to the way in which banks make their money, the banks still have to take on counterparty risk, liquidity risk etc etc on to their book – the additional cushion to allow for bad debt does not make these lending decisions any less risky as your suggesting it means the prospect of losses eventually moving all the way up the capital structure chain will be lessened. These are two different arguments.

maybe a new king Henry 1 or even VII is needed, but I doubt we will find one until the collapse comes.

The reigns of these monarchs were followed respectively by the Anarchy, and the effective tyranny of Henry VIII. Be careful what you wish for.

What we need are adults in charge. Personally, I think that the charge of the banks should be given to the Archbishop of Canterbury. I reckon the Church of England would sort them out good and quick.


True. However the issue here is that the operating profit for a bank is not driven by the size of its capital base it is primarily driven by the economic environment in which it operates i.e. whether the banks capital is large or small is not likely to make a difference to an SME being able to make his/her loan repayment. The economics on the ground will determine this.

The banks accounting returns may exhibit less variance in a larger capital envirnoment but that does not mean the operating envirnoment for its customers is any less risky.

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