the Vickers Report: a failure

The Vickers Report*; a failure

 

We should be suspicious of the Vickers Report because it has been widely accepted and without much protest from the banks**: suggesting that they are not really worried about it. Why is it a failure?

  1. It does not suggest reform of the originate and distribute model of banking according to which bankers are incentivised to create ever more products regardless of their potential systemic risk.
  2. No distinction is made between the different types of risk in the apparently cordoned off (ring fenced) investment banking sector. So called innovations in securities should be regulated in much the same way as the potential toxicity of the innovations of pharmaceutical companies are regulated. It would not entirely overcome toxicity, but it would be a start.
  3. The global economy is too interdependent for parts of the banking sector effectively to be cordoned off or ring fenced.
  4. The immense monopoly power is accepted. Hence they will continue to be able to intimidate governments. Banks are simply too big and will remain so.
  5. The tacit assumption that performance of the financial sector is an indicator of the performance of the economy is unchallenged. The investment banking sector is described as a casino. If it is a casino how can gambling possibly reflect anything but gambling: it’s like saying that the results of a race exactly reflect bookmaker’s odds.
  6. The absurd models used to price financial assets are unchallenged. Asset prices are heavy tailed not Gaussian distributions. We await the next crisis: next after this one, that is,  in 5 or six years time.
  7. Bankers don’t innovate. They develop securities, secured on other securities, that are secured on securities .......The originate and distribute model of banking rewards them for doing so. The absurd models that are used to price financial assets (mathematical exercises which most bankers don't understand) become the reality: the models become the reality: the map becomes the territory.

*The Report of the Independent Banking Commission (IBC) chaired by Sir John Vickers was published in the UK on September 12 2011. The principal recommendations are that the ratio tangible assets in the balance sheets should be raised to 10%. Tangible assets are widely reported as cash which they are not: approximately they are shareholders funds. Ring fencing the investment arms of banks is also recommended.

**Protests will follow.


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