04 February 2013

Alistair Darling: A crisis needs a firewall not a ringfence

The proposals by the Independent Commission on Banking – headed by Sir John Vickers – were entirely sensible. The banks should adopt them and they are entitled to ask that there are very clear rules in place if in future the regulators are to take enforcement action.

But there are two other elements of the Vickers proposals, and surely the most important is the capital that banks are required to hold and the lending ratio they are allowed to support. Vickers recommended capital of 4 per cent, a lending ratio of 25 to 1. The chancellor, in an apparent sweetener to the banks, has said the ratio should be 3 per cent, allowing a 33 to 1 ratio.

A requirement to hold more capital and to be more prudent about the amount of money that can be lent will, I suspect, be a far greater buffer against calamities than a ringfence. Nor have we heard how, in future, bond holders will be made to take some losses in the event of such failure. We have to end a situation where in the good times they profit, but in the bad it is the taxpayer who loses out.

A lot of work has been done on “bail in” for bond holders. That needs to be developed into a set of firm proposals. Sadly, when normal companies go bust there is some pain, but not in banks.

Finally, we can never sort out our banking problems in the UK until the eurozone does the same. The putative banking union will not work in its present form. The recommendations of Erkki Liikanen, governor of Finland’s central bank, which were meant to mirror those of the Vickers commission, appear doomed. The French and German governments – and more particularly their banks – have made it clear they will not accept ringfencing. This presents further risk to add to that of failing to recognise that some of Europe’s banks still badly need more capital and further write-offs.

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