The Independent Commission on Banking

214 Pages Displaying No Confidence in Solving the Banking Crisis

My disappointment in the content of the ICB’s preliminary report published yesterday morning was, like the report itself, generally anticipated and strangely muted.  The pointlessness of the ICB exercise was perhaps underlined by the response of the market in UK bank shares – flat to up 3%.

Sadly, the report’s most striking impression is its authors’ lack of confidence.  The report does not convey belief in the Commission’s understanding of the commercial drivers of modern banking – the hunger for accelerated profits via derivatives, the effect of the moral hazard of banking bailouts, bankers’ fears that, without huge overcollateralization, any non-governmental customer could go bust and should either be avoided or charged maximum possible margins and fees.

Surely the commercial drivers that have brought about the present crisis should have been set out, considered and addressed within the ICB’s recommendations.  But what do the ICB actually recommend?  Here is a sample:

• contingent capital “could be a useful tool” in helping banks deal with future crises
• “universal banks” can continue to operate investment and retail banking operation so long as retail banks hold 10% capital against their assets and implement other measures designed to protect depositors….
• on competition, Lloyds should sell more branches…

Rather worrying is the dumbed down nature of this long report.  On page 15 there is an introduction to the Financial System:

What is the financial system for?

2.4 The financial system supports the wider economy by:

• providing payments systems;
• providing deposit-taking facilities and a store-of-value system;
• lending to households, businesses and governments; and
• helping households and businesses to manage their risks and financial needs over time.

Deeply worrying are the uncorroborated assertions that clearly bound the ICB’s thinking early on in the report.  These weaken the reliability of the report.  At page 19 the report states two reasons why bank failures are much worse than the failures of non-bank businesses.  The second of which is “bank failure imposes collateral damage. To a much greater degree than is typical for other firms”.

Not only is no analysis suggested for this strong point (since bailouts have prevented UK bank failures, how can the ICB be so strident?), but also the communication of the point in glammed-up, non-scholarly imagery such as “collateral damage” reinforces my fear that this is really showmanship rather than the much-needed statesmanship.

Why has this report been commissioned and what is its significance?  All our major politicians have pronounced the banking crisis a “global” phenomenon.  Indeed, since even before the onset of the present crisis there has been an international institution tasked with producing global banking stability measures that has met and reported regularly, the Financial Stability Board.

The UK’s membership of the EU and participation in the Irish bank bailout imply that the Coalition regard the banking crisis as a tricky issue best left to other authorities. The British Bankers Association’s published submission to the ICB makes note of the above two points and brazenly advises the ICB to do nothing pending further FSB guidance.

The UK public are angry at the failure of the banks, the costs of bailing them out, and at the austerity measures seen to stem directly from the bailouts.

“Conventional Wisdom”, a term of derision coined by J.K. Galbraith, leaps out of the ICB’s preliminary report.  In politics, the convention has been that, when faced with a disaster, set up an independent commission to investigate and report, but take care to:

• restrict the commission’s remit;
• ensure that it is chaired by a distinguished establishment figure
• perhaps even appoint a sharp civil servant as secretary to ensure the commission’s focus never strays from the narrow remit

Unfortunately the cost/benefit analysis of the ICB may prove just to be a few more pounds sterling added to the UK’s tab for the banking system’s failure.