The chancellor, George Osborne, responding to the Vickers report, seems to think it's "mission accomplished" on banking. But the report's proposed reforms don't address the inherent instability of the banking system.
The main lesson of the financial crisis, illustrated in spectacular fashion, was that banks had been given too much regulatory freedom, profiting at the expense of taxpayers and customers alike. Politicians, economists and journalists lined up to agree that robust regulation was necessary to stabilise the economy and ensure the mistakes of the past could not be repeated. Three years and after pledging approximately £1tn in support of the sector, we are no closer to stabilising the financial system.
The Independent Commission on Banking was launched last year with the promise it would address systemic risk in the banking sector. However, all that was proposed in the final Vickers report was the ringfencing of retail banking away from investment banking activities, and banks being asked to hold more capital aside in case of trouble. While both of these initiatives should be welcomed, they do not address what caused the scale of the banking crisis.
The problem remains the same as it did in 2008, a banking industry that is too big to fail. It is a problem that was acknowledged by Vince Cable before he became the business secretary.
In the last 25 years we have allowed banks to balloon in size. Until the 1970s, banks' assets as a percentage of UK GDP remained steady at approximately 50%. By 2006, after decades of deregulation, banks' assets as a percentage of UK GDP were more than 500%. These large interconnected institutions dwarf the rest of the UK's economic activity, and when they are threatened we have no option but to bail them out.
Given this reality, even outright separation between retail and investment banking – which is not what the government has proposed – would not address the inherent instability in the financial system. Lehman Brothers didn't have a single retail bank, but its collapse sent shockwaves through the global economy because of the size and reach of its operations.
So Britain's bloated mega-banks will remain fundamentally unaltered despite the continued threat they pose to the economy. And taxpayers will continue to subsidise them, as government guarantees enable them to access finance at a significantly lower rate than would otherwise be possible. No other industry enjoys such a subsidy, which the New Economic Foundation's research estimates equated to £46bn last year. And the Vickers commission itself admits ringfencing will only reduce, and not eliminate, this "too-big-to-fail" subsidy.
It isn't the only support the banks receive from the public. Taxpayers are now paying £5bn per year in on-going finance charges on funds used to bail out banks. And that's without factoring the corporation tax cuts announced in Osborne's autumn statement, which are likely to cancel out revenue brought in by the government's bank levy.
The £7bn the banking industry estimates will be the cost of ringfencing is peanuts in comparison to these figures.
The media is unhelpfully reporting that the commission's proposals are the most radical reforms the banking sector has seen in the past century. But this is only a reflection of the excessive freedoms we have granted banks in the past; it does not mean that our problems are now solved.
The commission's recommendations, welcomed by the government, opposition and the banking industry, make plenty of political sense but very little economic sense. It is time to bring an end to the bankers' private welfare state.