Ignoring the obvious

After the final version Vickers report was released there seems to be another twist to the story.

It has been reported that the British Government “is preparing to water down a key recommendation in the Vickers report that would protect savers in the event of a bank going bust”. Apparently, “Investors and banks have argued that Vickers’ suggestion that retail depositors should be paid back before all other creditors if a bank collapses could risk destroying the market for bank debt and cause corporate deposits to flee the UK”. It adds that “The recommendation on ‘depositor preference’ is therefore set to be dropped from the final version of Vickers implemented by the government, according to sources, on the grounds that savers with up to £85,000 in the bank are already protected by an industry-funded insurance scheme”.

This however overlooks the two facts. The first is that the revised proposal places far too much confidence in the insurance industry in paying out in the event of a crisis. Secondly it does not take into account that without citizens spending their money there would be no economy! Lastly what if the insurance companies haven’t enough money to pay? What will happen to the domestic economy then when the banks get their money before hard working citizens?

The report notes that “Giving retail savers additional protection would have minimal benefits and could result in corporates moving their money abroad and bond investors demanding more collateral as they are moved down the debt hierarchy”. However, only the most short sighted companies would do this as the UK currently has a good credit rating, and to do otherwise would start a trend that would mean that few investors would get their money back. Waiting however, under these circumstances, would mean that the money would not be returned immediately but would eventually be returned.

It seems that “The UK has not finalised its approach to the report in part because it is understood to be reluctant to produce a parallel set of rules on bail-in bonds tailored to Vickers when the EU is already debating the same topic. It could instead try to slot the two regimes together and use the EU rules to flesh out the more vague Vickers proposals”.

So the wait for proper regulation continues.


2 Responses to “Ignoring the obvious”

  1. Implemented in full « Order and Tradition Says:

    […] the recent reports that key proposals of the Vickers report would be sidelined, members of the UK Government have said that it will be implemented in […]

  2. The time is now « Order and Tradition Says:

    […] report, but has not changed his mind about the need to ensure that banks’ customers are protected from losses generatedby the speculations of investment bankers”. The article goes on to mention how “UK banks […]

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