The question raised by the commission's report is whether stiffening simple rules can tame more complex financial beasts
The prototype banker was a smith, who kept gold bars safe and wrote promissory notes on the strength of them. In his long lost world, it would have been easy enough to set prudential rules about how many notes he could pen for each bit of bullion. The question raised by Monday's report by the Independent Commission on Banking is whether stiffening simple rules can tame today's more complex financial beasts.
The distinguished panel headed by Oxford economist Sir John Vickers said it wanted to reduce the temptation for banks to take risks, to improve their ability to absorb them, and to make it easier to clear up the mess when things nonetheless go wrong. The stress was on crisis prevention, and three years after the financial world stopped turning the exercise could be likened to installing fire sprinklers in a building that has already burned down. But the sad truth is that it is imperative to act now to avert another crunch. The scandal of institutions that were too big to fail would be as nothing compared with the catastrophe we'd be in next time, with huge pre-existing public debts that would render some banks too big to rescue.
It is a mark of the calibre of the commission that it felt no need to proclaim its recommendations radical, as most reports nowadays do. Instead, they straightforwardly proposed a mixed menu of "moderate measures" which they hope will combine to check the City's reckless ways without destroying its competitiveness. Attention was grabbed by the suggestion of forcing financiers to split casino and day-to-day operations into different divisions, a pale imitation of the outright split into different companies which the US imposed in the depth of the Great Depression and which Vince Cable had demanded at the peak of the crunch.
Having shrunk from going the whole hog, the commission seemed doubtful about the difference it could truly make here. It is "mindful of regulatory arbitrage possibilities at the boundary", which translates into English as an acknowledgment that financial professionals who make a handsome living from wriggling around rules and taxes will soon enough find the means to connect notionally separate divisions. This pessimistic note is in keeping with the previous scribblings of one commissioner, the Financial Times journalist Martin Wolf, who has warned of the huge difficulties of policing any boundary between retail and investment activities, and also questioned the point. The crisis, after all, has revealed that the taxpayer is effectively obliged to rescue all manner of things that fall on the wild side of the border, including corporations such as Lehman Brothers, which never took retail deposits. Aside from some significant but tangential suggestions for curbing the power of HBOS on the high street, the meaty recommendations were for higher capital requirements. These could have made a difference last time around, by forcing banks to underwrite more gambling with resources of their own. But there was a touch of naivety in the recommendation that for non-retail banking, the requirements need never exceed international standards. With the threat of unilateralism removed, the banks would be emboldened to work with their counterparts overseas to frustrate multilateralism.
The more general sense is that the "moderate measures" are not commensurate with the scale of what went before – an inevitable effect, perhaps, of the terms the chancellor set. An irresponsible sector beset by conflicted interest is now more certain than ever that the taxpayer stands behind it. There is still no onus on anyone devising new gambles to explain what good these are supposed to do, even though the top regulator, Adair Turner, has said many are "socially useless". And there is still no thought about how the state might use banks that it unexpectedly acquired for the common good. Big as the commission's brains are, all these questions must await another day.