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November 27, 2014 - Latest:

Is Vickers worth the cost?

  • 13 September 2011

Last week, the first ever report on financial services from the Ernst & Young Item club suggested that banking reform could have detrimental impact on the economy.

The Item Club said the commission's recommendations would end the implicit government guarantee of UK banks, raise borrowing costs and therefore costing the economy more generally.

Here is the key passage -

"The ITEM Club forecasts that the ring fencing proposed by the ICB would have the following effect on the lending markets:

  • The cost of wholesale funding to the investment banking divisions would rise by around 100bp (1%);
  • The loss of an implicit government guarantee and restrictions on cross-funding between retail and investment banking divisions would result in financial markets demanding a core Tier One Capital Ratio from investment banking divisions of around 14%; and
  • This would result in an increase in the cost of bank lending to large UK corporate of up to 150bp (1.5%).

"ITEM's analysis suggests that the impact of this on the wider UK economy is likely to result in a loss of up to 0.3% of GDP".

However here Citywire argues that we need to consider the potential costs of future bailouts and if Vickers' reforms prevent that, it is worth the money.

Chris Marshal writes: "The commission's recommendations would need to reduce the probability and impact of banking future crises by between one fortieth and one thirteenth in order to benefit economic growth, it calculates. Not very much then, even for ring-fencing's biggest detractors.  

"This low cost, which shatters the central argument of industry lobbyists, is based on a calculation of the social cost of a financial crisis occurring every twenty years or so, as it historically has done. The answer to this calculation comes to 63% of GDP, which is equivalent to losing about 3% of GDP a year. To put annual 3% loss in perspective, in 2011 we can expect GDP to come in at not much more than 1%."

The Telegraph economics editor Philip Aldrick is scathing about suggestions from Barclays that there is no cost to the implicit bank guarantee and notes that even RBS think it costs £6bn.

In his blog, this morning, he notes that "the Independent Commission on Banking estimates, it will cost banks £4bn-£7bn a year. Note that that is a cost to the banks, not the economy. Those higher costs will largely fall on the investment banking arm, where they can be absorbed by lower returns to shareholders or reduced bonuses – but importantly, not result directly in a contraction of credit to households and business. Inevitably, the ICB admits, there will be some cost transfer to the high street, but not on the scale that would damage growth."

But in its coverage, the Financial Times makes a point that should make everyone sit up.

It writes: "The commission estimates the annual benchmark cost of financial crises at about £40bn, so paying up to about £7bn to avoid that looks worthwhile. The commission's estimates are far lower than some of the banks' figures of up to £10bn. The impact should be largely mitigated by delaying implementation to 2019. Still, the costs are only worth paying if the proposals are successful in averting another financial crisis."

More…

Vickers banking report – first reactions

Has Vickers missed the target?

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