New Paradigm or Old Model?
On Monday 12 September 2011 Sir John Vickers delivered the Independent Banking Commission’s report on the future of the banking sector in the UK.  Partner Steve McColgan reviews the report:

The key points of the far reaching recommended reforms are:

• Retail banking is to be ring fenced from investment banking. At its simplest this means “High Street” (or these days telephone and on-line) personal banking for most people and small to medium sized businesses is to be separated from the riskier investment banking. The latter has been referred to recently as “Casino” banking in some media and blamed as a significant factor in the banking crisis of 2008, the effects of which we continue to live with.
• The retail banking operations must have their own significant capital reserves, which are likely to be set at higher levels than the international recommendations being made in the negotiations for the so called Basel III Convention.
• The retail banks are to have their own Boards of Directors in order that they are run entirely separately from the investment businesses.
• Competition is to be encouraged in the retail banking sector with initiatives and policies to encourage new entrants into the market.
• The legislation constructing the new framework is to be in place by 2015, within the anticipated lifetime of the current Parliament, with the aim that the reforms are operational by 2019.
• The Government is generally backing the reforms and wants these changes to happen.

There have been various comments and sabre rattling actions, most notably by Barclays Bank, that the proposed changes may prompt it to up sticks and move its headquarters from London to overseas. HSBC, a truly global operator, has also trailed similar suggestions from time to time. The effect on the UK economy and the credibility of the City of London as a world financial centre can only, at the moment, be a matter of conjecture. However with Barclays’ indicating the USA as a possible destination, similar reforms being considered by the regulators at the Federal Reserve may mean that there are no guarantees of a soft landing elsewhere if a UK based bank were to move abroad.

I am put in mind of an urban myth told to me over 30 years ago when I began studying Economics. A sweet elderly lady had been putting £1 from her wages and latterly from her pension away into her bank savings account week in, week out for over 50 years. One day she made an appointment with the manager at the branch of the bank where she had paid the money in each week over the highly polished counter.

“I want to see my money you’ve been putting in that big safe of yours please. That stack of £1s must be quite high by now”.

The lady’s misunderstanding of how the banking system works is endearing from the perspective of an era where we hear of leveraging deposits on unsustainable multiples and derivative financial products that are so complex that even those who invented and traded them appear to have had little knowledge or control over how they were intended to work.

The point of relating this apocryphal story is that it may be a timely reminder to the banks that for a large number of their individual and small business customers it may well be time to return to more directly accountable banking services closer to the customers’ actual needs and perception of how their accounts should be managed.

Stephen McColgan, September 2011