Thursday, 27 February 2014

The Independent Commission on Banking.

I’ve been rummaging thru the final report produced by the above, and am less than impressed by section 3.23. In reference to providers of deposit taking services, they say:
“So some risk of failure should be tolerated but it must be possible for the authorities to ensure continuous provision of vital services without taxpayer support for the creditors of a failed provider.”
Now think about that. Ordinary depositors are the main “creditors” of a “provider”. And Vickers is saying that failure should be possible. Plus they’re saying that there should be no “taxpayer support” in the event of failure.
Spotted the self-contradiction? If not, it’s as follows.
What exactly is “failure”? It’s not the fact of bank shares dropping to a quarter or even a tenth of their initial value. That of itself does not make a bank or any other entity insolvent. There is no reason for bank not to continue in business in the latter scenario.
No. Real proper “failure” is INSOLVENCY: that’s an inability to pay creditors (including ordinary depositors) 100p in the pound.
So what Vickers is saying is that banks shouldn’t be so safe that they’re never in the position of being unable to pay depositors 100p in the pound, but that when failure does occur there should be no “taxpayer support for the creditors of a failed provider.”
So Vickers in that sentence Vickers is advocating the “Cyprus” solution for an insolvent bank: that’s telling depositors to go hang. Now I bet you didn’t know Vickers advocated THAT.
And of course they don’t. In numerous other passages, Vickers claims their ring-fence will reduce the LIKLIHOOD of taxpayer funded bail outs, but they don’t claim such bailouts would be totally impossible.

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