Markets and Morality

Government should reject Vickers’ recommendations



James Croft comments on Nick Clegg's pronouncements

Government and Institutions

Mark Littlewood comments on Nick Clegg's speech on growth

Mark Littlewood and Prof Philip Booth comment on the proposals

Commenting on the release of the Vickers Report, Director General of the Institute of Economic Affairs, Mark Littlewood said:

“Banks – like any other business – should be allowed to fail in a way which does not bring the whole economy crashing down. Vickers’ proposals entirely miss the point. They do not safeguard banks but neither do they ensure orderly failure of banks is possible. The government should reject the ICB’s recommendations and implement changes to ensure banks can fail properly.

“The taxpayer should not be liable for any future banking collapse. Today’s proposals bring us no nearer to that goal.

“The idea that bank ring-fencing will safeguard banks from failure is a fiction. Lehman Brothers was an investment bank without a retail arm, Northern Rock was a retail bank without an investment arm; ring-fencing would have had no effect on either.”

Prof. Philip Booth, Editorial Director of the Institute of Economic Affairs, said:

“The ICB report smacks of an elegantly worked-out solution to problems that other bodies are addressing much more effectively.

“The ICB is right to seek ways to ensure that taxpayers do not bear the cost of banks’ failures. However, recent parliamentary legislation, together with developments at EU level and arising from the FSA, will deal with these problems in a way that will be much more effective than that proposed by the ICB. The key to banking reform must be resolution procedures to ensure that failed banks can be wound up. The ICB proposals for the general ring-fencing of retail and investment banking operations do not contribute to achieving this objective though it would be reasonable to give the Bank of England powers to require ring-fencing in a particular bank that did not have a credible resolution plan.

“During the US Glass-Steagall regime, there were huge failures in the separated investment and retail banking sectors that led to government rescues and the development of the “too-big-to-fail” mentality. Indeed, the events of the recent crash were precipitated by separate failures in the retail and investment banking sectors. Artificial separation will not make either the retail or the investment banking sectors safer and we do not want a retail banking sector that is so heavily capitalised that no bank ever fails.

“The ICB report was disappointing in other respects. It discusses at length the adverse affects of tax discrimination against equity finance but makes no recommendations other than for more regulation of banks’ equity capital.

“The government appears to welcome this report. It should also respond by immediately abolishing the bank levy, the explicit justification for which is the costs that bank failure can impose on taxpayers. If the government really has confidence that the ICB’s proposals will address that problem then the bank levy should have no future.”

Notes to editors

To arrange an interview with Mark Littlewood, IEA Director General, please contact Stephanie Lis, Communications Officer, 020 7799 8900, [email protected].

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.