The big news today for financial regulation is the final release from the UK’s Independent Commission on Banking, or what is being referred to as the Vickers Report. It recommends ring-fencing for the major banks. Key graphic on page 54:
Structural reform: practical recommendations
…The Commission’s analysis of the costs and benefits of alternative structural reform options has concluded that the best policy approach is to require retail ring-fencing of UK banks…The objective of such a ring-fence would be to isolate those banking activities where continuous provision of service is vital to the economy and to a bank’s customers. This would be in order to ensure, first, that such provision could not be threatened by activities that are incidental to it and, second, that such provision could be maintained in the event of the bank’s failure without government solvency support. This would require banks’ UK retail activities to be carried out in separate subsidiaries. The UK retail subsidiaries would be legally, economically and operationally separate from the rest of the banking groups to which they belonged. They would have distinct governance arrangements, and should have different cultures. The Commission believes that ring-fencing would achieve the principal stability benefits of full separation but at lower cost to the economy.
Felix Salmon points out how funny it is that Jamie Dimon gives his ‘What is good for JP Morgan is good for America’ speech, calling for the withdrawal from Basel capital requirement rules, around the same time as the Vickers Report is being released. Here’s a good graphic on how capital and bank failure will work under Basel (page 87):
BBC News’ Robert Peston has more on the historic implications of this report. We’ll discuss this more once I have a bit more time to digest it – but these are the kinds of strict regulations that in aggregate reduce the need for individual regulations. Given our history of massively scaling the banking sector in the past 30 years in both size and scope, re-approaching structural reforms in this area needs to continue to be part of the discussion for US financial markets.