Splitting banks: times wingèd chariots draw near

There is an argument, currently trotted out by the big banks that, putting the Vickers Commission recommendations into practice would damage the recovery.

It is certainly true that the large increase in their safety cushion does risk draining lending money from the system at a crucial time.  On the other hand, taking no action at all – as the banking lobby would like – would damage the recovery in three other important ways.

First, it would damage it by increasing the sense of risk and looming disaster.  We have now had four years of falling stock markets, precisely the same pattern as the Great Depression in the 1930s following the Wall Street Crash.

That is partly because the markets know, as individuals surely know, that the basic banking problem is not fixed.  We know that a repeat of 2008 may lie just ahead – it may emerge in October (the month where bank collapses tend to take place) driven by euro and dollar worries, which is in any case far too early for the Vickers reforms to be put in place

The fear is there partly because we all know that the debts of Italy, Spain and Greece combined are unrepayable in the conventional way.  A repeat bailout for the British banks may also be impossible, and the idea that no measures will be taken to prevent one can only bring that eventuality nearer.

The idea, floated by the Treasury, that there will be no separation until 2015 is particularly disastrous.

Second, taking no action would damage recovery by failing to shift the current desperate shortage of loans for small business.  This is a far bigger question than Vickers tried to tackle, but the idea of separating retail and investment banking does at least hold out the possibility that retail banking will once more feel proud of its raison d’etre again.

Third, there is moral damage here – as if there is no abuse, no lazy greed, no failure that the banks are capable of, which will not be pushed under the carpet for fear of ‘damaging the recovery’.

The evidence for this has just emerged in the USA where the newspaper American Banker has revealed that many of the country's largest banks received $6 billion in kickbacks from mortgage insurers over the last decade, according to a undisclosed investigation by the Inspector General of the Department of Housing and Urban Development.

The allegations were referred to the Department of Justice two years ago.  It suggests that companies such as Citigroup Inc, Wells Fargo, SunTrust and Countrywide required reinsurance partnerships on generous terms that broke laws against abusive home sales practices.

Banks seem to have created elaborate financial structures that had the appearance of reinsurance, but failed to transfer significant amounts of risk to their bank underwriters.

Some of the deals were designed to return a 400 per cent profit on a bank's investment during good years and remain profitable even in the event of a real estate collapse.

But the Obama administration has failed to act on this.  There has still been no prosecution.  Because – you’ve guessed it – it might ‘damage the recovery’.

The point is that we will not get a recovery with faulty banks, and we will run the risk of another collapse until these problems are solved.  All eyes are now on the UK political establishment. 

Have they got the nerve to act or on this, or any of the other major issues that face us in the future?  Or do they possess the only two UK political skills: doing nothing for a generation and then riding roughshod over everyone else when it is too late?

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Read nef's response to the Vickers Commission proposals.