Why the Vickers Report on Banking Reform Failed the UK and the World

Kotlikoff rips the Vickers commission's final recommendation:

The Independent Banking Commission’s final report is a grave disappointment. The ICB (chaired by Sir John Vickers) seeks to reinstate Glass-Steagall by ring-fencing good banks and letting bad banks do their thing and, if they get into trouble, suffer the consequences. This proposition was tested by the collapse of Lehman Brothers, whose failure nearly destroyed the global financial system. 

The commission retains the current system apart from some extra requirements primarily imposed on the good banks (the retail banks). The main impact of this is likely to be to foster more financial intermediation to run through the bad banks, i.e. if you impose more regulation on financial companies that call themselves X and less on companies that call themselves Y, companies that call themselves X will start to call themselves Y. In short, the commission has in effect taxed good banking while sanctifying shadow banking. The commission has also chosen to regulate based on what a bank calls itself, rather than on what it does.

A year back, Mervyn King, Bank of England governor, described the current banking system as the “worst possible.” In a speech, delivered at the Buttonwood Conference in New York, he called for the analysis of Limited Purpose Banking — a reform plan that I developed, which replaces traditional banking with mutual fund banking and makes no distinction between financial intermediaries.

At the end of last year, I travelled to London and met the commission staff to discuss Limited Purpose Banking. I had thought the commission would take the proposal and my discussion with them seriously. That was not to be. In fact, the commission spent very little space discussing the proposal, despite Mr King’s urging that it be carefully studied, and notwithstanding its remarkably strong endorsement by economics Nobel Laureates George Akerlof, Robert Lucas, Edmund Phelps, Edward Prescott, and Robert Fogel as well as by former US secretary of state and former US secretary of the treasury, George Shultz, by Jeff Sachs, Simon Johnson, Niall Ferguson, Ken Rogoff, Michael Boskin, Steve Ross, Jagdish Bhagwati, and many other prominent economists and policymakers.

Do the opinions of the governor of the Bank of England and all these prominent authorities on finance and economics deserve to be dismissed in seven sentences? For seven sentences is all the commission was able to spare when it came to discussing Limited Purpose Banking, notwithstanding the 358 page length of its report.

Full article here.