LONDON – Over the last three years, oceans of ink (or bytes) have been expended on articulating schemes to solve the conundrum of “too big to fail” banks. Many academics and pundits have castigated regulators and central bankers for their inability to understand the obvious attractions of so-called “narrow banking,” a restoration of Glass-Steagall-era separation of commercial and investment/merchant banking, or dramatically higher capital requirements. If only one of these remedies were adopted, the world would be a safer and happier place, and taxpayers would no longer be at risk of bailing out feckless financiers.
In response, bankers have tended to argue that any interference in their business would be an unconscionable assault on their inalienable human right to lose shareholders’ and depositors’ money in whatever way they please. Moreover, they argue that the cost of any increase in required equity capital would simply be passed on to borrowers in the form of higher interest rates, bringing economic growth to a grinding halt.
One might characterize this as a dialogue of the deaf, except that most deaf people manage to communicate with each other quite well, through sign language and other means.
Onto this fiercely contested terrain marches the United Kingdom’s Independent banking Commission, set up last year by Chancellor of the Exchequer George Osborne, with a brief to examine possible structural reforms to the banking system aimed at safeguarding financial stability and competition. The Commission is chaired by Sir John Vickers, the Warden of All Souls College, Oxford, which in British academia is about as good as it gets. At his side sits Martin Wolf of The Financial Times, so a good reception in the pink pages can be expected.