The future of banking hangs in the balance
There is a short and a long-term way to view the debate on structural reforms in banking.
Short term, the question is, will the EU’s Liikanen knock out the UK’s Vickers? Or will Vickers prevail? The recommendations are mirror images of each other, one ring-fencing so-called retail banking the other ring-fencing the investment banking bit. But you really can’t have two ring-fences – or what would in effect by three fences – in one group.
Long term, both reports will soon be sidelined. Sensing the way the tectonic plates are shifting, Andy Haldane, having damned Basel III and all its works, is already urging more “unbundling” of banking. While politicians for the most part would like to relieve the pressure on the banks – in the vain hope that backing off would make them start lending again – the political and public mood, as well as market pressures, dictate otherwise. Bankers are shell-shocked.
“Banking is not any fun any longer” complained one CEO.
Both reports will be viewed with the perspective of history as half-baked attempts to find an exit from The Money Trap. They will be seen as palliatives, not cures.
The latest recommendations from Liikanen show that the “ongoing crisis” is pushing European policy-makers and bankers to consider more radical reforms than they would have contemplated even a couple of years ago, and to that extent it is welcome.
But the acid test is whether the changes will be sufficient, if enacted, and taken with other regulatory reforms, to restore confidence. It is the banks’ loss of trust in each other’s creditworthiness, on top of a decline in the public’s trust, that continues to cripple them, weakening their ability to fund themselves in the market independently of central bank support. Will they reduce systemic risks? Putting proprietary trading into legally separate entities with their own capital, yet part of the same banking groups, will not itself reduce excessive risk-taking.
There must be questions as to whether, when push comes to shove, such a structure will be robust – or whether, if the “ongoing crisis” worsened further, the authorities would again find themselves bailing out the whole group. As with the report of the Vickers Commission, there is an implication that the main (“retail” or customer-focussed) part of the banking group is in effect protected. If so, Liikanen’s recommendations would increase moral hazard.
The report places much reliance on bail-in bonds, but these suffer from many well-known flaws. Equally, few experts now believe that recovery and resolution plans can be designed in such a way as to be operationally workable, short of re-designing the entire banking system. And that is what, in the end, will be needed – a complete restructuring of the European banking sector. Further, a new basis must be found for the business of banking. Governments, regulators and bankers are a long way from recognising that.
Meanwhile, it will not be long before the finger of suspicion moves back to the central banks, as they busily continue with policies that undermine public’s trust in money.
In 2001, Ken Rogoff discussed the future of currencies areas and central banking. After a review of the pros and cons, he concluded as follows:
“I believe the invention of the modern central bank has actually, on the whole, been a very good one”.
How many people would second that proposition today? I am sorry to say, not half as many as ten years ago.