Any Other Business | 29 January 2011

Interim findings from my Really Independent Commission on banking reform

The Warden of All Souls, Sir John Vickers, has revealed the outlines of what he thinks about banking reform, so perhaps the Warden of Any Other Business — that’s me — should do likewise. Vickers, a former Bank of England economist, is chairman of the Independent Commission on Banking, which will publish interim findings in April and conclusions in September. Its objective is to recommend ways to stabilise the banking system and make it more competitive, while reassuring savers that their money is safe without implicit or explicit government guarantee.

In a speech last weekend, Vickers indicated that he hasn’t ruled out ‘narrow banking’ — the severing of investment banking from the retail branch networks where our savings reside. But close textual analysis suggests he may be keener on ‘ringfencing’: allowing these two forms of business to coexist within the same group, but insisting that the retail side has sufficient capital of its own to protect it from the storms and follies of the investment-bank trading floor.

Anyone who relishes the idea that such worldly deliberations are being conducted by the head of the cloistered 573-year-old ‘College of the Souls of all Faithful People deceased in the University of Oxford’ — where The Da Vinci Code meets Inspector Morse, as it were — will have particularly enjoyed the donnish precision with which Vickers avoided saying anything prematurely precise. He posited ‘a universal bank U’ which has two operations, ‘retail bank R and investment bank I’. A necessary condition for U to fail, he went on, ‘is that R or I fails, but this is not a sufficient condition unless R and I both fail if either does… In shorthand… retail banking is safer with universal banking than with separated banking if and only if the probability that I saves R exceeds the probability that I sinks R.’