CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 606-xi

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PARLIAMENTARY COMMISSION ON BANKING STANDARDS

BANKING STANDARDS

MONDAY 12 NOVEMBER 2012

SIR JOHN VICKERS

Evidence heard in Public Questions 746 - 854

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1

Oral Evidence

Taken before the Joint Committee

on Monday 12 November 2012

Members present:

Mr Andrew Tyrie (Chair)

The Lord Bishop of Durham

Mark Garnier

Baroness Kramer

Lord Lawson of Blaby

Mr Andrew Love

Mr Pat McFadden

Lord McFall of Alcluith

John Thurso

Lord Turnbull

Examination of Witness

Witness: Sir John Vickers, Former Chairman of the Independent Commission on Banking,

gave evidence.

Q746 Chair: Sir John, thank you for coming to see us this afternoon, and thank you

also for fitting in with us. This meeting has been brought forward by two hours to enable

peers to contribute to a debate in the House of Lords later this afternoon. As you know, this is

a Committee charged with looking at standards. Can I begin by asking you whether, if you

had had our remit on standards, your recommendations would be any different?

Sir John Vickers: Whether the recommendations that we, the Independent Commission

on Banking, made would have been different had standards been within our remit?

Chair: Yes.

Sir John Vickers: We certainly gave thought to questions about culture. “Culture” was

the word we used more than “standards”, and it was before some of the events of this year.

Our view was that, given the questions that we had been set, it was not for us directly to seek

to regulate cultural standards, which is a difficult thing in any case, but that the issues that we

were looking at, both on structure and on loss absorbency and on the competition and

consumer side, all had a very clear bearing on questions of culture and, as we might now say,

of standards.

I do not believe that the recommendations that we made on the questions that were put

to us would have been materially different if standards had been explicitly among, let us say,

the issues that we were to have regard to.

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Q747 Chair: Colleagues will come back to that point in a moment. Before I hand over,

I would like to ask one other important question for our work, particularly with respect to the

pre-legislative scrutiny that we are doing. What tools do you think one can reasonably use to

persuade banks to be co-operative in ensuring that the ring fence works and that they do not

game the ring fence? With that particular thought in mind, do you think there is any merit in

putting full separation on the statute book at the start as an alternative structural form of

regulation should banks prove unco-operative?

Sir John Vickers: As it were, on a contingency basis?

Chair: Yes.

Sir John Vickers: On the first part of that question—how to make the fence strong—as

you know, we recommended a fence with a degree of flexibility in its location, but were very

clear that it had to be a strong fence, otherwise the exercise would be completely undermined.

A lot will therefore depend upon the rule making that the draft legislation envisages on the

rules relating to the fence. That is a set of issues about legal independence, financial

independence, capital buffers and so on. It is about the independence of the governance

structure; the duties on the directors of the ring-fenced bank; and how the population of

directors of the ring-fenced entity relates to the directors of other parts of the bank. That

would be my first point.

Next, as you know, we did not recommend moving to full separation, for various

reasons that I would be very happy to go into in discussion. The question you pose now is

whether there should be a power, let us say provided for in the statute, so that the Government

or regulator—I don’t know which—in certain conditions could require total separation. My

feelings would be mixed. Since I believe that ring-fencing would work, I do not believe that

taking that step would be necessary. However, I understand the spirit of the question to be, in

part, would it not help the strength of the ring fence to have this reserve power in case it

looked wobbly or crumbly at some point in the future?

Q748 Chair: Would it alter the behaviour of banks?

Sir John Vickers: It is possible that it would, and therefore my instinct would not be to

resist that suggestion. I will, however, if I may, make two points. There are legal questions,

including in European law, about total separation, which we did not go deeply into since that

was not our favoured path in any case, but it would be important to ensure, if such a power

were introduced, that it did not fall foul of wider European law provisions on the fundamental

rights of owners of capital or whatever it might be.

The second point I would make is that there are obvious questions about who would

exercise that power, if it were there as a reserve power, and under what conditions that power

would be exercised. It is not unprecedented for companies in this country to be required to

separate, but I believe it is very rare. There are two examples that come to my mind, thinking

back to competition policy days. One was brewers and pubs in the late ’80s, which was a

separation after a very lengthy inquiry by the then Monopolies and Mergers Commission.

There was advice to the Government; the Government partly took the advice and that was a

separation of sorts. The other, much more recently, was in relation to the British Airports

Authority. Again, after a very full investigation by the Competition Commission and, in that

case, various steps in litigation on various points, separation resulted. But in both those

instances, it was under a well-developed statutory scheme, with a lot of due process, legal

challenge and the rest of it. Whether that would be required for a reserve power of the kind

you describe here, I do not know, but it would seem important to give thought to that.

I have a footnote, but let me pause after those rather lengthy remarks.

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Q749 Chair: The two points you have made are technical and practical issues that need

to be addressed, but I was asking you about the point of principle and the effect it might have

on behaviour and standards in banks—standards of behaviour with respect, in this case,

towards the regulator. Do you have a view on that or are you neutral on that?

Sir John Vickers: I would say open-minded and balanced. I was not trying to pour cool

water on that.

My footnote is perhaps relevant. One of the questions which I know this Commission

has been thinking about is the relationship, in a corporate structure, between a ring-fenced

body and the rest of a bank. In our report, we made it very clear that a ring-fenced body

should not own the rest of the bank or, indeed, have a large exposure to the rest of the bank,

for the obvious reason that it could be dragged down by that.

We were, however, permissive about other kinds of ownership structure. In my mind’s

eye, I tend to think of a ring-fenced bank and the rest of the bank, which might be multiple

entities, as it were as siblings within a holding company structure. We left open the possibility

that a ring-fenced bank could be owned by another entity within the group, even possibly the

investment bank. I have to say that I am less comfortable with that respective arrangement

than with the sibling arrangement.

Another kind of reserve power that is not as radical as a full split would be to have—or

even to mandate, although I do not know whether the cost-benefit analysis would support

that—a reserve power that would prevent, let us say, investment bank ownership of a ring-

fenced entity and move it more on to what I am calling a sibling structure. I know that

Liikanen in the EU report speaks in those terms as well.

Q750 Chair: But you are still not answering the question of principle; you are just

saying, “Well, I am open-minded about it.”

Sir John Vickers: If I had a confident answer, I would give it. I do not have a confident

answer on that point, because I simply have not given enough thought to it. Needless to say,

my situation in the past 14 months has been very different from the 15 months before that,

when I was with a commission with a terrific secretariat and we could have robust discussions

of these points. I would answer if I had a confident answer. I am open-minded, but feel unable

to go further.

Chair: We have some of your staff aboard, so we will see if they have been giving

some thought to it as well.

Q751 Lord Turnbull: To draw on your competition experience, is this a sanction that

could be applied only for the sector as a whole, or could you move a badly behaving bank into

this regime?

Sir John Vickers: I had taken it that the logic of the reserve power in this context was

in relation to a badly behaving bank, not the sector as a whole. I took it to be that the prospect

of this reserve power would encourage better behaviour—that is the logic of the argument—

so that its use would perhaps not be necessary, but each bank would be on notice that if it was

found to be gaming the system in undesirable ways that were not checked, then this reserve

power would be deployed.

Q752 Lord Turnbull: Could that be done by the FCA or would they refer it to the

Competition Commission?

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Sir John Vickers: I don’t think it would be a question of referral to the competition

authorities under current competition law because it wouldn’t, on the face of it, be a

competition issue. It would be a something else issue. So I would not see the Competition

Commission, or the prospective Competition and Markets Authority, as the natural body to

investigate these questions. One reason why I, and we, were wary of mandating a full split for

the sector as a whole was that it could create a sector of stand-alone, rather similar,

undiversified, highly correlated institutions, whereas if a power were deployed in relation to

one or two banks, but not the others, that loss of diversity point would not have such traction.

Q753 The Lord Bishop of Durham: Sir John, your report sets out very clearly and

powerfully the argument for ring fence rather than separation at the time you wrote the report.

Since then we have heard, particularly from Paul Volcker and Andy Haldane, and from a

couple of others, the case for the prosecution, as it were: they should be separated and that

ring fence would not work. The particular area that Paul Volcker was focusing on was not the

legal or even the confidence areas, but the cultural contamination which he pointed to in

which commercial banks have become more and more transactional and less and less

relational. Do you think that separating the two within a ring fence would have sufficient

positive impact on standard and culture within the separated entities? How would you defend

the case, as it were, on cultural contamination?

Sir John Vickers: I would say first of all that the cultural issues that are important in

banking, which have come to light, are not only about, as it were, contamination alleged to

come from investment banking to retail banking. There are some other purely retail issues as

well. On the Volcker rule—I don’t know whether there will be an opportunity later for more

discussion on this—I think transplanting that into the UK context and doing nothing else

would be a seriously inadequate solution to the issues that we face. I think a more interesting

question in relation to Volcker is not “ICB or Volcker?”—it is more “ICB and Volcker?”—

but the “or” question seems to have had much more discussion than the “and” question. I

believe that with the safeguards of the kind that we lay out, and which the draft legislation

enables the rule-making for, and with appropriate rule-making by the PRA, the ring fence will

work.

What gave me a lot of comfort during our process was having as commissioner

colleagues Martin Taylor, whom I know appeared before you recently, and Bill Winters, who

has a wealth of US, UK and global experience. In our sometimes quite robust discussions I

assure you many ideas got defeated and left on the cutting room floor. But I believe with the

legal and other safeguards here it will work, including on the cultural and standards point. The

ring-fenced entity that we recommend and provide for would, I believe, be a very good

framework for lending to the real economy—the non-financial business economy and

households throughout the UK, with UK deposits and other sources of funding, providing for

those activities. I am not a pessimist. I am not so gloomy as to think that merely sitting in the

same corporate group as a group that is also doing investment banking will undermine that

through some nasty osmosis through the fence. Neither am I such as optimist as to believe

that creating a ring-fenced entity will magic away other issues of culture and standards that

can exist in a purely retail setting.

Q754 The Lord Bishop of Durham: Could I push you a bit further on that? Under

your sibling approach, you would still have a holding company and, as is inevitably the way

of things, being chief executive or chairman of the holding company is going to be seen as

being the top dog. If you get someone chairing the holding company who has come up

through the investment banking side, surely it is not some subtle process of osmosis; it is the

5

guy sitting at the top saying, “We’ve got to push these dozy retail bankers to be a great deal

more aggressive.”

Sir John Vickers: You have articulated part of the reason why I am less comfortable

with an investment bank owning a retail bank—

Q755 The Lord Bishop of Durham: I am not talking about owning; I am talking about

sitting, but with somebody who has got to the top from the investment banking side.

Sir John Vickers: I quite understand. The point that you raise does give me some

discomfort about the non-sibling structure, the parental structure, where that concern seems

greater. In relation to the sibling structure, I do not claim that that risk has become zero, but I

would also point out that there may be some healthy cultural influences that could work the

other way as well. I am not saying that is equally likely, but I do not think it should be

dismissed. Your question was also premised on the top dog—the metaphors are becoming a

bit mixed here—being from an investment banking background. It has been very noticeable in

the UK how the most senior positions in many of these institutions have moved—although

maybe this is going back—from retail to investment bankers at the top, but the—

Q756 The Lord Bishop of Durham: Other way round, I think you mean. They have

moved from investment bankers to retail bankers.

Sir John Vickers: Sorry. I meant that in recent years, with a recent exception, it has

generally been the investment bankers who have been taking control of the institutions—

where the risks are greater. But remember: in terms of the directors of the ring-fenced entity,

there would be some overlap between boards, but they would be very largely independent, in

various ways. The chair would be independent. They would have directors’ duties, very

possibly including regulatory and maybe even statutory duties to preserve the integrity of the

fence. We have seen it in a very different setting, one that we mention in our report. Enron

owned Wessex Water when Enron went down. There was a setting where legally,

economically and in terms of directors’ duties, that fence worked, even in that pretty awful

situation where the culture at the top was clearly not what one would hope for.

Q757 The Lord Bishop of Durham: I shall finish with a very brief question on the

area of standards. In the written evidence, a significant number of institutions, including

banks, have suggested that we need a new independent professional body, with professional

standards, for banking generally. Is this something you feel would be helpful? Would it add

much?

Sir John Vickers: It is not something I have given careful thought to, but it strikes me

as a helpful and constructive suggestion. Again, though, such a thing would not be a cure-all.

Q758 Lord Lawson of Blaby: There are these two issues: the question of the form of

the separation—whether it is complete or whether it is your ring fence—and the standards and

culture. I must say that I rather prefer your word “culture”. I think it is closer to what we are

concerned about. These issues are so interlinked that I would like to put them together. I shall

just park one thing. The question of European law, which you raised, is obviously something

we will want to take advice on, because we will need to know where we stand on that, but it

was not a determining factor, was it, in your case? If the European law had not been there,

would your recommendation have been different?

Sir John Vickers: No, our recommendation would have been the same.

6

Q759 Lord Lawson of Blaby: You talk in your final report about the question of

separation or the ring fence. You say that separation has risks as well as benefits. That is

always the case with any decision one has to make. There are always pros and cons. The

question is: which is greater? Would you not agree that the appalling things that have come to

light in banking since your excellent report was published show the culture to be even worse

and the cultural problem to be even greater than perhaps we had previously thought? The case

for having a complete separation so that there cannot be an infection must therefore be

stronger. It may not be more decisive in your eyes, but it must be stronger. That is why Paul

Volcker has reached the position he has and that is why, as the Bishop of Durham pointed out,

Andy Haldane has come very close to that position.

On the other hand, there are your arguments against, and you mention two, as far as I

can make out. One is that you do not want to have a whole lot of retail banks with much the

same model, because you think that is dangerous. Throughout the 1930s, when there was a

huge crisis in banking in many parts of the world—in the United States and continental

Europe—we had these commercial banks separate from investment banking or merchant

banking, and none of them went pop, did they?

Sir John Vickers: No, it all depends on the nature of the crisis.

Q760 Lord Lawson of Blaby: During the years since the 1930s none has gone pop

either. It does not seem to be a very dangerous model, does it?

Sir John Vickers: Let me take the two sets of points in order. It is certainly true that

evidence has come to light during the course of the past year suggesting that, in parts of the

sector at least, standards are lower than would have been expected and we believed at the time

of our final report. However, I do not see those events as shifting the balance of the argument

decisively away from what we proposed in favour of full separation. They are part of the

reason why I have come to have these anxieties about the non-sibling model, which we have

just discussed.

I would also point out that the standards and culture issues have emerged on both sides

of the fence. We have had mis-selling issues at least emerging on the retail side of the fence

and we have had LIBOR and so on, which centred on the wholesale side of the fence,

although that depends on who is reporting the LIBOR numbers; it could occur in different

parts of the group.

Part of the question on the mis-selling issues is whether they would have happened in a

totally separated world. I fear that they might well have done. There are issues about

commission payments and the revenue model of retail banking in the UK, especially in a

period of very low official interest rates. I would caution against any view that, had there been

separation, those retail culture and standards issues would not have arisen. I suspect that that

is simply not the case. Partly for that reason, and for the other reasons mentioned, I have not

felt myself leaning towards a full split.

On the second part of the question, which was on how large the risk is that a stand-

alone, undiversified, correlated UK retail banking sector would experience a crisis, I think one

must not be too sanguine, despite what happened from the late-Victorian period to Northern

Rock. First, Northern Rock is an example of an essentially retail bank—albeit an ill-regulated

and ill-managed one—hitting very serious problems. We have seen very large losses in other

UK banks, especially on commercial property lending or things related to that, whether

securitised or otherwise. We have seen nearby in the Irish case some very large retail banking

losses. I do not believe that we are in a simple world of utility and casino, where the utility is

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totally safe. There are risks in any form of credit extension and they can be correlated risks,

when an economy hits trouble. One, in my view, cannot dismiss the possibility that a stand-

alone, undiversified sector would get into trouble. If it got into trouble when the rest of the

world or the rest of banking was doing okay, one would have lost a great deal by a full split,

because there would not be the group resources to mitigate the losses in UK retail.

Q761 Lord Lawson of Blaby: That last argument, I must say, strikes me, in a practical

way, as pretty thin, but let us put that to one side. Of course there can be bad lending, and bad

lending against property is probably the most likely. However, you said there was bad

regulation, and that has indeed been admitted, so would you not agree that these relatively

simple—obviously, nothing is totally simple—plain vanilla banks are much simpler to

regulate and effectively supervise, which is the word I prefer, than more complex banks?

Therefore, is there not a case, since effective supervision is so important, for making the

supervisor’s task as easy or straightforward as it can be, by giving them a focus that is

simpler?

Sir John Vickers: Where possible, that is desirable, but I am not sure that a full split is

as simple as all that. One merit that I see in ring-fencing, compared with doing nothing, is

that, although the supervisor has to police the boundary, it gives a gain in simplicity,

compared with a situation where everything is intermingled with everything else. That is

important in normal times, but it is especially important in times of crisis, when questions of

resolution arise, and unless there is separability in the structure, I fail to see, in the case of

some of these large institutions, how resolvability is going to be credible.

As between ring-fencing and total separation, there is still the boundary-policing job to

be done; there is still a host of questions about what the entities on either side of the divide

can do in the boundary areas. I do not believe there is a great regulatory gain in simplicity or

otherwise as between ring-fencing and total separation in those terms.

On the US experience, some of the Glass-Steagall provisions were repealed exactly 13

years ago, but they had developed and been watered down and eroded over time, so the same

kind of issues arise. I do not think it is simple case of saying you have a full split, with vanilla

here and tutti-frutti there, and it is all simple. It is complex there, to a pretty similar extent as

with ring-fencing.

Q762 Lord Lawson of Blaby: Of course, Glass-Steagall lasted for a very long time.

The Wall Street banks lobbied like crazy to get it repealed, so it was obviously having some

effect, or they would not have spent a fortune to get it repealed. My last question is this: is

there anything you can conceive of which might make you feel that the ring fence was a bit

risky and that separation was safer?

Sir John Vickers: Given the information available now, I am firmly with the

recommendation that we made. I believe that full separation would certainly have higher

costs, and for a gain that might not even be positive, because of this risk point about having an

undiversified, stand-alone UK retail sector. Your question is, is there anything that could

change my mind? We all have to learn from how events unfold, so one has to be open-minded

and learn from that. I am not saying the chance of a ring fence working is 100.0%, and

neither is the chance of full separation working. But that is certainly where I am at the

moment, and firmly so.

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Q763 Chair: So you fully agree with Martin Taylor, when he said—I am paraphrasing

slightly—that if the industry were to turn out to be unreformable, it is possible that, in the end,

a full split would be necessary, but having a ring fence in place to start with would be a jolly

good place to begin.

Sir John Vickers: I think my tone would be slightly different. If the industry turned out

to be unreformable, and I am not so pessimistic as to think that, of course it is possible that

total separation would turn out in due course to be the better step to take, but I do not see ring-

fencing—

Q764 Chair: Better than doing nothing.

Sir John Vickers: Indeed, but I do not see ring-fencing as step one of an agenda that

has step two clearly in view.

Q765 Baroness Kramer: Thank you for your flexibility today, Sir John. I am one of

those who may have to leave early, so I make my apologies in advance. Could I ask you about

competition and banking standards? In ensuring effective competition, which of course,

brings market discipline to the table, is that a mechanism that is important in improving

banking standards, conduct and customer service?

Sir John Vickers: Absolutely. You use the phrase “effective competition”. What that

means to me is not just competition in the sense of lots of rivalry—of course, competition has

not always been terribly strong in this sector—but competition to deliver what consumers

want and to deliver their needs, rather than competition to spring traps in small print or to sell

people things that they manifestly do not need, as in some of the PPI cases. For me, effective

competition in that sense is very much to do with standards and culture, because if one can get

competition to be of the right kind and be what consumers and customers more generally want

and need, one has a much closer alignment between the interests of the banks—or those parts

of the banks—and the consumer interest and wider public interest. We have seen, regrettably,

too many cases where that condition has not held.

Q766 Baroness Kramer: Taking that definition of competition, which, if I understand

it correctly, has structural implications within it, what would you see as being the role of the

regulator? I know that in the ICB report, the commission was in favour of giving a

competition objective to the FCA, but it did not, at the time, propose a competition objective

for the PRA. Would you think differently if you were taking a look at that again today?

Sir John Vickers: Our primary focus on that was indeed on the FCA. I, and we, are

very pleased at how the statutory objectives to be given to the FCA have developed since we

started considering these issues—so, the strategic objective, in terms of the relevant markets

functioning well, and then consumer integrity and competition objectives. I think that

absolutely does belong with the FCA. It has to do with how those markets are regulated, so it

is a separate thing from competition law enforcement, in the sense of going after cartels and

the abuse of dominance. It is trying to get the everyday workings of these markets to be pro-

competitive in the sense mentioned.

Because of the move to twin-peaks regulation with the FCA and the PRA, it is less clear

that it would be right to give a competition objective to the PRA. We did not propose such,

but we did, in the report, discuss—especially in the area of capital requirements and other

aspects of the regulatory burden on smaller banks, so the risk weights that they can and can’t

use as a practical matter, and so on—the fact that there is clearly the potential for entry

barriers and impediments to competition in that area. My sense of the job that the PRA has is

9

that it would not be right to make, despite all the points I have just made, competition in any

sense a top-line objective of the PRA. As for whether it should be something that it ought to

have regard to, very possibly, but that is not something I have thought through in great detail.

Q767 Baroness Kramer: It will now have a sort of passive role in not impeding

competition. From what you are saying, that sounds as though it meets your requirements,

although others might feel that we still may be lacking a lever. Is it something that you would

wish to see reviewed in order to see whether it is working effectively?

Sir John Vickers: The background to what I said is a view that the FSA, as it was

originally created, had such a diverse array of regulation that competition was in there, but

as—I am sure I will get this wrong—something like the seventh of its secondary objectives,

so it was not going to get the prominence in some matters that perhaps would have been

desirable. The move to the FCA and the PRA is a golden opportunity that has been taken to

give the FCA a central top-line competition objective. And I think it would be very

unfortunate to muddy the waters in terms of the PRA’s objectives, but I think it is important

that it does not inadvertently do things detrimental to competition that were not advancing

prudential regulation in the proper way. As to whether it should be kept under review, why

not?

Q768 Baroness Kramer: I would like to ask you a question in the narrower sense. You

came out in favour of a redirection service, but you were much more hesitant about account

number portability. Reading the passages on the redirection services, I didn’t get a sense of a

huge conviction that this was going to change people’s behaviour dramatically. What do you

think would be necessary to reduce that real resistance to making change that seems to be

inherent within this industry?

Sir John Vickers: I believe there’s a good chance that it will change behaviour and in

particular that it will change consumer confidence around the switching process, which is

patchy at the moment. And with a redirection service in place—I think that it ought to be in

place a year from now, as September next year is the date that the Government have given—

that should be a large and important step forward in terms of consumer confidence in that

area, and hence on behaviour of consumers and hence on behaviour of the banks to attract and

retain consumers.

There was certainly no intention to appear lukewarm. We did consider the case for

moving to full account number portability. However, we thought that the costs of that, even

though we didn’t believe all the numbers put to us, were likely to be substantially greater, and

it was not clear—without seeing how the redirection service goes—what the incremental

benefit of portability would be. So it seems to me that a perfectly sensible approach is to get

the redirection service in place; there are other related things about payment systems reform

in general. Let us see how that redirection service goes and then come back to number

portability.

It is a much larger job if one moves to account number portability, because of—as it

were—the plumbing of the system. And I think there isn’t a direct read-across from the

telecoms area, where I think number portability was essential for competition, because for me

to call you I’ve got to know your number and it’s not quite the same in banking. So I don’t

think there’s a direct read-across from the two, and the approach that we recommended feels

like common sense to me: do redirection; see how well that works; and then see what the

further costs and gains might be beyond that.

10

Q769 Baroness Kramer: Of course, a number of people—Donald Cruickshank being one of

them—have described the telecoms companies’ response before that number portability was

imposed on them as, “We can’t do it, it will cost too much, it’s technically impossible”, and

then the day after all was suddenly achievable. So, I just wonder if some of that is giving you

second thoughts and I also wonder whether or not you have also considered some of the

thoughts that Andy Haldane put in front of us, of moving into the 21st century in terms of

technology and looking at almost a central utility and a common technology platform that

could store, in effect, customer account details and therefore really allow both account

portability and competition in a much more dynamic way. Is that an issue that you think

might have some potential to change the level of competition in this industry dramatically?

Sir John Vickers: On the first point about telephone number portability, it is not only

now that I have a chance to reflect on that; I was one of Don Cruickshank’s advisers at the

time, so I was actually involved in those issues. And if I remember rightly, they too went to

the Monopolies and Mergers Commission for a licence modification on those issues.

On the point you attribute to Andy Haldane, I think one has to be practical and realistic.

It may be that the technology reaches a point—I don’t know, a decade hence, maybe sooner,

maybe later—where proposals of that kind are practical and cost-effective and in that case

they may be well worth doing, but I don’t think we’re at that point yet. So they might be

something to look forward to, but I wouldn’t see them as a subject for urgent policy initiative.

Q770 Chair: Donald Cruickshank told us that the competition objective that had been

given to the FCA was worth virtually nothing. So you disagree with him?

Sir John Vickers: I disagree.

Q771 Chair: I am surprised that you have not thought through whether the PRA should

be given a competition objective in detail. You would agree—wouldn’t you?—that the PRA,

being the issuer of bank licences, is crucial to competition from new entrants into the market?

Sir John Vickers: I agree with that, yes.

Q772 Chair: Why didn’t you look at it?

Sir John Vickers: Well, we said the things about the importance of the PRA exercising

its powers in a way that was not anti-competitive towards the smaller players, and some of

these technical issues around risk weights are part of that.

In terms of whether something should be enshrined in a statute or not, we thought that

was of the first order of importance for the FCA, for the reasons just given, and where,

frankly, I disagree with the view you quote from Don Cruickshank. In the case of the PRA,

we had a large number of things to think about. We were concerned about the substance of

policy, including the regulatory requirements on the smaller institutions. I do not feel I know

enough about statutory duties and statutory schemes and how that relates to other provisions

of developing regulation. We were conscious of the move from the integrated FSA model to

the twin peaks, with one body primarily charged with the market issues, competition,

consumers and integrity and the prudential regulatory authority with its enormous

responsibilities on the micro-prudential front, to put it in those terms.

Q773 Chair: There seem to be two quite distinct answers there. One is that you were

ignorant of the statutory duties and how they would play out, and that that was not your field

11

of expertise, and the other is that you had a lot to think about anyway and did not focus on

this. But it does seem to be quite a central issue, doesn’t it?

Sir John Vickers: I think it is an important issue—

Q774 Chair: And one that you did not look at.

Sir John Vickers: And it is welcome that this Commission is giving thought to it.

Q775 Chair: Okay. Thank you very much.

Q776 Mark Garnier: Sir John, if you look back to a year or 18 months ago, to the

written evidence that was given by the banks, through your interim and final reports and

certainly to the Treasury Committee, there is a fair amount of cynicism by the banks about the

idea of a ring fence. They seem fairly reluctant to get involved. Barclays’ written evidence

said, “We remain un-persuaded that a retail ring-fence offers enhancements to financial

stability”, and HSBC said, “We strongly believe the universal banking model remains the best

way to achieve this.” Yet now they seem to have undergone some sort of Damascene

conversion, embracing ring-fencing. Do you think this a genuine conversion or do you think

this is rather a cynical attempt to pay lip service to the general scenery and that they are not

really convinced?

Sir John Vickers: I know it will not wash for me to say that that is a question for them

to answer.

Q777 Mark Garnier: I want your opinion.

Sir John Vickers: In the final months of the ICB’s work, there were some quite

noticeable changes in the stance that the banks were taking towards us. Remember, our

timings were such that we published an interim report in April 2011, which set out the broad

scheme of ring-fencing, but without fleshing out the design, because we had not got on to that

and we needed to consult on the wider concept as well. In June of that year, the Chancellor in

the Mansion House speech spoke warmly, given where we were in our proceedings, about the

idea of ring-fencing and I think it was that which made many in the sector, and city analysts

and the like, attach a much higher probability weight to structural reform happening in the

UK.

What some of the banks urged on us at that point was not to do ring-fencing as we had

laid it out, but to do the Volcker rule instead. It has been striking, in some of the continental

European debate around the time of the Liikanen report, that some of the champions of

otherwise unstructured universal banking there have themselves said, “If you do anything

structural, do the Volcker rule.”

I know that the banks did not favour ring-fencing as their ideal solution. Some, in

fairness to them, were considerably warmer towards it. I am thinking of Lloyds TSB in

particular and Santander UK, which in a sense sits in a ring-fenced structure of a geographical

kind, at least, in any case. Some other banks clearly did not want this to happen, but it may be

that their estimation was that it was going to happen in some form or another and that they

should engage constructively with that debate. I would say of the banks that they did engage

constructively throughout our process. It was, in part, thanks to that that we were able to go

from start to finish in the 15 months allotted to us.

12

Q778 Mark Garnier: In response to Lord Lawson a little earlier, you referred to the

Glass-Steagall Act and how that, over a great many years, has succumbed to lobbying. Do

you not feel that there is a great risk, given the fact that banks are now much more savvy

about how to lobby Parliament, that we may get regulatory creep over time and that we will

see the effectiveness of the ring fence being watered down due to political pressure from the

banks and from other areas?

Sir John Vickers: It is certainly a risk, and it would be a risk with total separation, too,

as the history of Glass-Steagall itself illustrates. I believe that the regulatory institutions and

the legislature would be alert and robust enough to resist that. It is a very welcome thing that

our proposals, at least in broad terms, have not only the support of the Government but cross-

party support. That, too, is helpful in resistance to creep.

Q779 Mark Garnier: But do you not worry that the Banking Reform Bill has very

little in it, apart from the fundamental basic thing of narrow banking at one end and keeping

trading out of that organisation at the other end? There is very little detail. Ultimately, there is

an awful lot of creep that can go on by lobbying. Changes can also happen through the FPC,

the PRA and, of course, the FCA. Do you regret at all that the Bill does not have more in it to

reinforce what you are talking about, or do you think that it goes far enough?

Sir John Vickers: I think that it is impossible to answer whether it goes far enough

without seeing the secondary legislation. This is primarily an enabling Bill, so one will have

to form a judgment on the package of this draft Bill and the secondary legislation and the

other measures that may follow. Of our interim report, some criticised it and said, “That’s all

very well, but the devil is in the detail.” I welcomed that and did not see it as a criticism. I

particularly liked the “That’s all very well” part. People were right in spring 2011 to say, “We

will have to see what their proposed design is and how it will work.” There may be a parallel

in this case, too. As to whether or not the primary legislation should have gone into further

detail, there are questions about the balance between the legislature and the Executive, and

different branches within the Executive. I am the least expert person around this table to

answer on that. Surely the Bill enables our recommendations to take effect.

Q780 Mark Garnier: But it also enables your recommendations not to take place.

Sir John Vickers: In an enabling Bill, the best one can hope for in phase one is that it

enables the recommendations to take effect. That is why it all rests on the secondary

legislation.

Q781 Mark Garnier: But you do agree—this is a fundamental point that is causing

some anguish—that the secondary legislation could be so weak as to be almost completely

irrelevant. Do you not see a risk of that?

Sir John Vickers: I do not see a risk of that.

Q782 Mark Garnier: Why not?

Sir John Vickers: Because the Government in their December response to our report, in

the June White Paper and in the October preamble to the draft legislation have stated what

their policy is on various points. While I may not agree in every particular with that, I do

agree with the broad thrust of it, which is absolutely faithful to our recommendations. I see no

reason to doubt that the secondary legislation will flesh out in the ways that we have been

discussing, but I am reserving judgment on that until I have seen it.

13

Q783 Mark Garnier: The debate has moved on a great deal— you just have to listen to

some of the comments from other questions. We now have Liikanen. You have put a fence

around the deer park and Liikanen cages the tigers—I think that is how it is described. We

have also seen more coming on in terms of account portability. If you have a conversation

with VocaLink these days, you will find that they are working out a way of implementing

account portability in a much more effective way. Things seem to have moved on a great deal.

Do you think that the ICB report is now, in the light of what is happening, looking a little bit

dated?

Sir John Vickers: On the contrary. First, the competition recommendations—except for

the point about the FCA duty, which we discussed—were going to be taken forward other

than by legislation. There was the Lloyd’s divestiture and the moves towards account

portability1. The OFT is on the case—hawk eye over the market and so on—so that was never

going to be in the legislation here. I really do not see this as dated, because I think the draft

legislation enables our recommendations to be taken forward. That is what I have every

reason to believe the Government will do, because of very public statements that it has made.

As to Liikanen, I am delighted, and I have to say somewhat surprised, how close in

spirit and in policy recommendation the Liikanen recommendations are to the

recommendations we made. If you had asked me not just six months ago but even six weeks

ago whether there would be this much similarity of approach, I would not have expected so

much. Again, it is not the same in every respect, but I believe that in light of Liikanen the

terms of debate in Europe have changed and that there is going to be a serious structural

debate about banking in Europe on the basis of Liikanen, which even a year ago I would not

have expected to happen. I notice as well that in their global financial stability report last

month, and in speeches that Christine Lagarde has made, the IMF are calling for a global

debate on business models in banking. So, far from being tired or on the shelf, I think the

debate is a lively one. In a sense, the US and Volcker went first, but the UK—as is fitting for

a country with a financial centre of our scale—has had a leading role in that.

Q784 Mark Garnier: One last short question. We have repeatedly had conversations

with banks about the possibility of their leaving the country if things become too tough for

them here, and moving their domicile. Indeed, only last week Douglas Flint was repeating his

point that they have now deferred their decision until 2015. When you were doing work with

the ICP and coming up with your report, how much consideration was given to the fact that

your report could result in banks’ moving their domicile?

Sir John Vickers: We gave a lot of consideration to that. One reaction to that kind of

statement is to say, “We must be terribly cautious.” Another is to say, “Oh, they’re bluffing.”

We did quite a lot of hard work, which appeared more in one of the annexes to our interim

report than in the final report, looking at the question of whether measures of the kind we

were then developing would be threatening to the City of London as a location for financial

services activity. We in part crafted our recommendations so as to minimise any such threat.

One virtue of the ring fence, although not the primary one, is that you can have high capital

buffers there while international business carries on being conducted according to

international standards. That was very much addressed to this point. The way we calibrated

the capital requirements, the loss-absorbing debt, the bail-in and all the rest very much had an

eye to those things. We did not think that the geographical arbitrage risks were great in

relation to retail banking, given where we were pitching our recommendations.

1 Witness correction: meant to say “easier account switching” instead of “account portability”.

14

In part for the reasons that Lord Lawson was alluding to, if you look at the history of the

City it is a comparatively recent phenomenon to have retail banks all commingled in one big

institution with these ballooning balance sheets doing things on the other side of the world,

massive exposures to other kinds of financial institution, derivative books and all the rest of it.

We did engage with some of the economic and financial historians on these points, too. We

had an eye to that, and I do not believe that going forward with recommendations of this kind

would be a swing factor. Banks are making location decisions periodically in any event, and

there is a whole host of other issues—tax issues and all the rest of it—but I do not believe that

our proposals will be threatening to that. They ought to be the opposite, because a financial

services sector underpinned by more stable banks is a safer thing for a country, and a better

thing than one with banks that pose high risks.

Q785 Mr McFadden: I want to follow on from what Mark Garnier was asking you. He

asked you about the basic shape of the Bill and you seemed quite optimistic about that. You

say that this is a perfectly reasonable way to implement your proposals. What about the

content? How do you feel about the areas where the Government have departed from that?

For example, Capital is asking us whether we think simple derivatives should be in a ring

fence. Do those worry you or not?

Sir John Vickers: In my mind, there are a handful of issues where there is some

variation. Some of those worry me, and some of them do not.

Q786 Mr McFadden: What worries you?

Sir John Vickers: One is the question of the leverage cap. The recommendation in our

report was that for the large UK banks, which would have a 10% equity buffer rather than the

Basel baseline of 7%, the leverage cap should be moved pro rata, as it were. It is not quite pro

rata, as the leverage cap in the Basel discussions relates to a wider definition of capital than

equity capital, but the result was that we recommended that instead of a permitted ratio of 33

times leverage, the limit should be 25 for the large UK retail banks. The Government have

taken a different view. There are some arguments for taking a different view. I stick with the

recommendation that we made in our report, and I think that the other ex-commissioners are

in the same place. That is not a legislative issue, because it does not appear on the face of the

Bill, but it is one policy point.

A second one where I suspect that the Government position is right and we might want

to rethink what we said is on the question of de minimis and whether there should be an

exemption for banks below a certain size. We were in two minds about that —I must not say

“on the fence”—and we concluded that, “on balance”, we were not persuaded of the need for

a de minimis threshold.

In consultation, having done further cost-benefit analysis, I think there are pretty good

reasons for having a de minimis exemption. The Government are speaking about that

threshold being £25 billion of mandated deposits. My instinct is that that is on the high side.

In our own discussions, we were talking about £20 billion of total assets, which is probably a

lot less than half of the £25 billion, if you think of total assets versus deposits. But I think it is

probably right to have a de minimis exemption. I query whether it should be so high. I query

that about Liikanen too. His report has really quite wide exemptions.

Those are two of the five. You mentioned the question whether the ring-fenced entities

should be allowed to sell hedging products as principal, not just as an agent for the rest of the

bank. Our recommendation was to say no, partly for reasons of resolution—it is simpler and

more straightforward—and partly for reasons of regulatory simplicity. It is easier to say “You

15

can’t do it” than “You can do it, but only if they’re simple”. It would be a supreme irony if we

ended up with a 100-page rule book defining the meaning of the word “simple”. The other

reason was that we did not believe that the agency model, where the business customer could

come to the ring-fenced entity and buy a derivative product from that entity sourced by the

rest of the bank, would increase costs greatly.

The Government position on that has moved, and I understand that the issue is being put

to this Commission, but for those reasons, we recommended against. That is where I remain

now. I have a couple of other issues if you would like to.

Q787 Mr McFadden: Why not?

Sir John Vickers: One is the question of the global scope of the requirement of UK-

based banks to have what we call primary loss-absorbing capacity, over and above the equity

buffer. I am sorry that some of this gets into technicalities.

Q788 Mr McFadden: Is this the HSBC issue?

Sir John Vickers: I have heard it described in that way. Our view was that much of

what we were trying to do, although not the only thing, was to get the UK taxpayer, if not off

the hook, then very remote from the hook, for future bank losses. Having that buffer, which

might consist of bail-inable debt and things of that kind, was a cost-effective way to achieve

that. In its December response to our report, the Government made the totally reasonable

point that if a bank can demonstrate that it was resolvable, etc., without the need for that, it

would be disproportionate to place that requirement on the bank. The logic of that seems to

me to be impeccable. But note that the onus of proof was on the bank. In the June White

Paper, the Government seemed to have changed their position to the onus of proof being on

the regulator. I thought that was an unwise step.

In the text preceding the draft legislation in the October document, the Government

seem to be somewhere in between their December and June positions. I am not completely

sure how to interpret it where it talks about the pros and cons and states that a balance needs

to be struck. Again, that is a hard thing to disagree with, but I would flag it up as something to

be alert to in the secondary legislation.

The final one on my list of five is the matter of non-EEA assets, and in our scheme the

ring-fenced bank would not have those on its books. The Government are proposing that the

ring-fenced bank would not normally have non-EEA branches and subsidiaries, which I think

is absolutely right. I believe there is a question about the Crown dependencies, which I won’t

go into, but there is a passage in, I think, the June White Paper in which the Government

envisage some kinds of non-EEA assets being on the ring-fenced entity’s books. It is not clear

how that could happen in the absence of a branch presence, so perhaps this is an empty box,

but again it is a possible difference between what we proposed, and what might emerge from

secondary legislation. I would put that as something to be alert to rather than as a criticism of

where things have got to.

Q789 Mr McFadden: That is a very helpful list for us to look at, and to keep an eye on.

Can I switch to something else—the structure of the ring fence? In his evidence last week,

Andy Haldane went through a list of things that he said had to be separate, and clearly

separate, for a ring fence to be real and for people to have confidence in it. He talked about

separate governance, separate risk management, separate Treasury and debt functions,

separate remuneration structures, and separate human resources structures. Do you agree with

that list?

16

Sir John Vickers: I would add to it. There needs to be independence of capital and

liquidity. That is very important. There are issues about dividends flowing from the ring-

fenced entity to the parent, whether the parent be in a sibling structure or otherwise. It is

precisely those things that the regulatory rule-making about the integrity of the ring fence will

need to address.

There is the wider issue that I touched on earlier about whether there should be a

specific director’s duty, not only of the ring-fenced entity’s directors, but those of the parent

as well, to protect the integrity of the fence.

Q790 Mr McFadden: Do you see our difficulty here? Correct me if I am wrong, but

you are saying that you agree with the list and would add to it, but the Bill does not set that

out. It leaves it all for a regulator in future, so we are being asked to pass a verdict on a

structure for a ring fence when we do not have set down clear detail that all these things

should not be separate, so we don’t really know whether the ring fence will be hard and

impermeable, or whether it will turn out to permeable.

Sir John Vickers: I understand that point. It is an instance of the balance between the

legislature and the Executive, and I do not have expertise in that. I believe that a good deal of

the regulation would be subject to parliamentary approval of various kinds, but I am not sure

whether that will be true of the specific provisions relating to these issues, nor do I feel well

placed to comment on whether such provisions should be in primary legislation or not. Again,

the full package will be seen only when the secondary legislation and other regulation is there,

but so far as it goes—an enabling Bill is an enabling Bill—it is entirely consistent with all

those things. However, as you say, it does not by itself deliver them.

Q791 Mr McFadden: Let me try one other way to end with, leaving aside the primary

and secondary legislation point of whether things should be left to regulators. On ring-fencing

as a concept, when Paul Volcker was sitting in your chair about a month ago, he returned time

and time again in his evidence to the idea that ring fences are flawed because they are

permeable over time. Banks will find a hole the size of your finger and pour everything

through it and make it as large as possible. What is your response to this essential charge of

permeability to the ring-fence concept which is at the heart of your report?

Sir John Vickers: I believe Martin Taylor said that fences need maintaining. They need

vigilance and all the rest. I believe it is a structure that has a very strong prospect of working,

not just in the near term but through time. It does need vigilance. It does need firm and

effective regulation. It does need the appropriate behaviour in banks themselves. Again I

would say that total separation can dissolve as well, as we have seen through historical

examples; the issues are not unique to ring-fencing. We have seen in quite different corporate

structures ring-fencing work perfectly well. In the Santander UK case that I alluded to, there

one has a perfectly practical and, to the best of my knowledge and belief, working model of

ring-fencing in that context too.

Q792 Lord Turnbull: Can I ask about the independence of the ring-fenced bank? Only

one day after Andy Haldane appeared before us, Baroness Hogg dissented rather strongly

from this and said that the notion that a ring-fenced bank could have entirely separate

governance was wrong and that it “would sever the line of accountability through the parent

to the providers of risk capital and therefore make banks less investible.” In other words, why

would people put money in, buy the shares of the group, if the group had no real authority

17

over how it got used in the subsidiary? Is there some middle way, which creates a sufficient

degree of independence, but still answers this question of accountability to shareholders?

Sir John Vickers: I believe there is and it is not the case that at group level there would

be no control at all over what the ring-fenced entity did. These would be ring-fenced banks

doing retail banking in the UK and more generally in the EEA, which, if they did it well and

served the customer well, would make perfectly good returns on investment for their group

parents. So I don’t see this as a case where the ring-fenced entity is wandering off in some

completely different direction, inconsistent with the parents’ obligations. Just as if there is a

water utility, which is part of a much wider group, or a water and electricity utility under the

same parent, I don’t think that is an impossible set of challenges at all.

The directors of the ring-fenced entity would have the company law duty to promote the

success of the company of which they are directors. It may be that they should and/or would

have a specific regulatory duty relating to the integrity of the fence, the third-party

relationships, preserving the capital buffer, the terms of any third-party relationships and the

rest. But I don’t see this as a fundamental difficulty, any more than companies having

subsidiaries more generally is an impossible business model. Manifestly it works in all sorts

of settings.

Q793 Lord Turnbull: These directors of the ring-fenced bank are appointed by the

group, not by the regulator?

Sir John Vickers: Yes, but there might be conditions on that concerning independence

in the sense of a certain portion of directors of the ring-fenced entity not getting any

remuneration from elsewhere in the group, just the fee for being directors of the ring-fenced

entity. Appointment could be at some other level or with the shareholders or wherever, but

subject to those constraints laid out in regulation and so on.

Q794 Lord Turnbull: Could I come back to this leverage point? You are persisting in

your view that 4.06% was the right answer? The Government said it would be inconsistent

with international standards. Clearly you think that is not a knock-down argument. Could you

explain why you feel that?

Sir John Vickers: I would not go to the stake on the 0.06. I would settle for 4. I regret

that the international community has not made a similar pro-rata move. In the Basel process, it

is proposed that the so-called G-SIFIs—the global systemically important financial

institutions—should have additional equity on top of the baseline 7% in relation to risk-

weighted assets, depending on their size and importance, going up to 9.5%. I find it puzzling

that there is not a parallel move of the leverage ratio cap in those cases. It would seem to be

the completely natural, logical thing to do, but international negotiations work in mysterious

ways and, no doubt, there is a reason why that proposal has not come forward.

Q795 Lord Turnbull: Are you saying that if push came to shove and nothing changed

internationally, the UK should still go to 4 point something?

Sir John Vickers: I would, because, for me, it is a natural corollary of the UK going for

higher equity capital buffers for the ring-fence bank than the international standard. It is rather

as though we have got domestic systemically important banks—a lot of them are global but

they are systemically important domestically. Therefore, higher capital requirements make

sense because of the “too-big-to-fail” problem, and just as the global SIFIs at international

level have higher capital requirements, so you should do the same domestically, but I would

take the further step of moving the leverage ratio in parallel.

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If I may, the leverage ratio does apply to this wider definition of capital than equity

capital. Therefore, if you stick at 3%, it means that you are not only allowing 33 times

leverage, in relation to equity capital you are allowing a multiple that is much closer to 40. I

had a conversation with someone who wasn’t listening properly and I said about moving to 33

times leverage. He said, “Goodness, no wonder there was a crisis”, and I said, “No, that is

where we are hoping we will get to.” A lot of it comes down to confidence in risk weights. If

you think that risk weights are perfect, you do not need a leverage backstop, but they are not,

so you do.

Q796 Lord Turnbull: Finally, it is a question of bail-in capital. Some people have

expressed scepticism as to whether these mechanisms will work. It is also the case that this is

not provided for in the Bill; it is assumed that this will be dealt with at the European level. We

know, however, that sometimes European legislation takes a very long time, and sometimes it

never arrives. Is this something that we should provide for in the Bill—that if there is a delay

in the European provision of this scheme, we could go ahead unilaterally?

Sir John Vickers: This is all tied up with the recovery and resolution directive. My

sense is that the broad thrust and spirit of that is consistent with what I might call the UK

approach, but one cannot say that of every detail. I am hopeful that the European processes

will move forward within finite time, and if the risk was great that that would be in the

European long grass for a long time, I think there would be a case for making UK provision

ahead of that. There may be things that I should know but do not, but I have no reason to

think that the European processes would move as slowly as that, and this is an area where a

degree of consistency across the EU matters so I think that it makes sense to see it in those

terms. As for the European decision, the state of that debate is not completely set yet; there is

a debate to be had in those terms.

You began by saying that some are sceptical that bail-in and so on will work. I think it

was very shocking that, in the crisis, bondholders, whether it was dollars or euros or sterling,

by and large came out with 100 in the pound, dollar or euro, by and large That is clearly a

grossly unsatisfactory situation when you see billions of pounds of taxpayers’ money and the

taxpayer being jumped very near the front of the queue of loss absorbency.

Can one move to a situation where it is absolutely certain that the bondholders would

bear loss? I think that total certainty is, perhaps, not to be had, but I believe that one can

increase enormously the chance that bondholders would bear loss, and our proposals were

crafted with a view to maximising that probability. You need the bail-in power of the

regulator and a significant or substantial slab of such debt—this is the PLAC point we were

talking about earlier. It needs to be unsecured debt with appropriate maturity and the rest. One

thing in the draft Bill that is very relevant to that is depositor preference. The pari passu

treatment of bondholders and depositors, including insured depositors, I think was a further

reason why the bondholders came out so well, and a much clearer hierarchy of loss

absorbency would be socially very valuable.

It will increase some banks’ funding costs, but only as a reflection of the risks they are

running, and that is a thoroughly desirable thing to do. It possibly even plays into the points

about standards and culture—if risk is reflected in the marketplace in the way that it has not

been, that may exert healthy disciplines of all sorts.

Q797 Lord Lawson of Blaby: May I go back to the governance question, which is

obviously of crucial importance? Your committee said that the independence of the board of

directors of the ring-fenced bank was absolutely essential to the success of your model. It is

obviously something that would not be a problem if there were separation, because then you

19

have two quite separate entities with two quite separate boards of directors, who are clearly

independent of each other—

Sir John Vickers: Provided you stop cross-membership, yes.

Q798 Lord Lawson of Blaby: Let’s see. Also, following on from what Pat McFadden

was saying, you have the complete separation of two separate sets of shareholders, whereas

you have a single set of shareholders on your model, which complicates it further. And you

more or less admitted this, because you said to the Treasury Committee, giving evidence in

May of last year: “I think governance arrangements are a topic that does need attention, and

which we are starting to think about”. What conclusions have you reached, apart from the fact

that you said that you now prefer the holding company with two separate subsidiaries to the

idea of the investment bank owning the commercial or retail bank—that is clearly a sensible

move, but it is not a fundamental rethink of this policy?

Sir John Vickers: A criticism that I would make, with hindsight, of our interim report,

which was published in April, a month before that hearing, was that we said very little—next

to nothing—about the topic of governance. One of the great virtues of going out to

consultation is that people draw to your attention things that you have neglected, so we put

much more into that through the closing months of our report and said much more about it in

the final report than in the interim one. The remark I made there—it was correct at the time, I

do not withdraw that in any way—was that we as a commission, with some months to run,

needed to think much more about governance, and we did.

Q799 Lord Lawson of Blaby: And you have thought about it.

Sir John Vickers: And that is reflected in the final report.

Q800 Lord Lawson of Blaby: In that case, what are your answers to Paul Volcker’s

point to us? When he gave evidence to us, he said: “I do not know what it means to have an

independent board that is subsidiary to another board.”

Sir John Vickers: I go back to some of the points made. The directors have the general

company law duty to promote the success of the company. I think it would be very

appropriate for them to have regulatory duties as well, in relation to the ring fence. If the

parent said, “Oh, don’t worry about your capital buffer, we need that at group level or to put

over to the investment banking side”, that would clearly be a conflict between the higher-level

wish and the subsidiary wish, and the constraint from ring-fencing would say that that transfer

of capital may not happen. That is a constraint imposed by public policy; it would be

monitored by the regulators and it would be a duty on the directors not to make that transfer.

But that is perfectly consistent with the subsidiary being an excellent retail banking outfit in

the UK or Europe more generally, making good returns for investors, just as for subsidiaries

in all sorts of conglomerates and companies of all kinds it is absolutely routine to have lots of

geographical or product-line service subsidiaries. I am not troubled by that.

Q801 Lord Lawson of Blaby: Can you give us then a practical example, because I am

not aware of one, but you may well be, of a subsidiary that has an independent board that is

wholly independent of the parent company?

Sir John Vickers: I would need to check, but I believe that in the utility sector that kind

of thing happens.

20

As to independence, we did not speak about total independence. We said, first, that it

depends on how much outside-the-fence activity is being conducted. I think if a group had a

tiny amount of tigerish activity and it was nearly all deer park, that would be a different

setting from one that is half and half or with the balance the other way round.

We spoke about the chairmanship of the board of the ring-fenced bank; we spoke about

the non-executive directors and their independence. It is not total independence, but it is a

very strong degree of independence, together with duties relating to the integrity of the fence.

Q802 Lord Lawson of Blaby: One final, quick question. You spoke a lot earlier of the

benefit as you saw it of diversification, of not having a stand-alone retail bank. Therefore, the

benefit would be with an investment bank that might then support it if it gets into trouble.

Would you therefore welcome even more a retail bank being part of a supermarket group?

You would have even more diversification there and there would be a commercial logic as

they are both retail businesses.

Sir John Vickers: Such an arrangement would need to go through all the regulatory

requirements. Subject to that, I would be neutral. That could well be an efficient arrangement;

it could be an inefficient arrangement. It would be clearly subject to all the regulatory

safeguards for banking and financial services, but I would not have an objection.

Q803 Lord Lawson of Blaby: You would like it if it were on the same grounds.

Sir John Vickers: I would be neutral.

Q804 Chair: You’d be sitting on the fence. You said that you were silent in your

interim report and then you put a great deal of work into thinking what to say on corporate

governance in your final report. I do not have the whole report in front of me but I have an

operative paragraph that reads, “The directors of both the ring-fenced bank and the group as a

whole should be responsible for complying with the spirit, as well as the letter, of the ring

fence.” That does sound as if, after a great deal of work, Sir John, you have concluded that

we have to rely on the goodwill of bankers.

Sir John Vickers: The reference was to standards and culture. The reason for putting it

that way is that in a sense it goes to the whole thrust of the regulatory approach of the PRA, or

at least it matches with that. It is not just a question of ticking the boxes to say we have done

this, that and the other. It has to be done in a wider sense than that. The reason I draw a

parallel with the PRA approach is that it is a thing that needs judgment on the part of the

relevant people in the bank and on the part of the regulator. It was another way of saying that

this is not just a box-ticking kind of compliance.

Q805 Chair: It is not inspiring a great deal of optimism though, is it, to say that we

have got to rely on the bankers to deliver this and just hope that their hearts are in it?

Sir John Vickers: Isn’t it to say that in these things as elsewhere—and I think this is a

point of central relevance to a Commission looking at standards—that standards are more than

minimalist compliance with the rules?

Q806 Chair: What is the incentive for the bank to do the right thing? What is the

incentive for those directors not to do the wrong thing?

Sir John Vickers: If they have a director’s duty relating to the integrity of the ring

fence—

21

Q807 Chair: You are suggesting the duty; that is the next line in the paragraph, which

says, “A duty to secure this outcome could be implemented through the existing approved

persons regime.” That has not seemed very robust up to now, has it?

Sir John Vickers: I think there may be other things as well. If a director has a duty—

possibly even a statutory duty—in a certain respect, that is a pretty serious thing. If I were a

director with such a duty I would take that pretty seriously, and the incentives would be

strong. I would hope it is not just a question of incentives but also of doing the right thing.

Q808 John Thurso: I apologise for this, Sir John, but I am going to come back to the

detail of the ring fence, because I think that is one of the most important parts of our work in

looking at the legislation. Before I do that, may I ask one quick question? Your report is

broadly predicated on the assumption that growth in financial services and a strong, good

banking system are basically good for the economy—provided they are properly structured,

well regulated and well run, they are broadly a good thing.

Sir John Vickers: Well, I am not sure it is predicated on that. We drew attention to just

how much of the growth in balance sheets over a 25-year period had been due in part to

lending to the household sector through mortgages and otherwise, and how much had been

due to lending to the non-financial corporate economy, but by far the fastest growing part was

in lending within the financial system itself, which on a benign view—that was probably just

tenable up until about 2006—was the intricate parcelling out of risk, but in fact it turned out

to be the opposite. I do not think there was any predication of that kind.

Q809 John Thurso: The reason I ask is that, in his evidence, Andy Haldane drew our

attention to the July report by the Bank of International Settlements, or to the research work,

which purports to show—indeed, if you read the report, it does show this—that there is an

optimum size for financial services. After that point, you actually start to consume resources

that might be better placed elsewhere. So the point is whether, anywhere in your construct,

you looked at the point of a financial services industry that had grown too big. What you were

looking to do related to an allocation of resources, as much as saying, “If it is growing and it

is well regulated, it is fine”, but actually, there is a bigger societal problem because the

industry is consuming resources that it should not have had in the first place.

Sir John Vickers: We certainly looked long and hard at the size of the sector in relation

to the capital that is backing it. That is another facet of the leverage point. We did a great deal

on that. We did not look at the ideal size of the financial services sector in the UK; we did,

however, think a lot about incentives. If you have an unchecked implicit guarantee from the

Government to the financial services sector but not to other sectors, that sector, other things

being equal, is going to get way too big relative to others. Our approach was relevant to the

size issue, but we did not sit there and think, “It ought to be 20% smaller.”

Q810 John Thurso: The point is that, if you accept the thesis that human and capital

resources should not necessarily be consumed by the financial services industry, where you

put the ring fence and how you construct it can have a significant impact on future

development and can be either constructive or destructive, depending on where you put it.

Would you accept, therefore, that there is a logical argument, or a reasonable intellectual

argument, for looking at where the ring fence is located, not simply on the binary

consideration of your thinking but on a wider interpretation of what we actually want from

financial services?

22

Sir John Vickers: As you know, our ring fence design was for a strong fence with

degrees of flexibility in its location. Part of that is that we did not want the location aspect of

the design to have unintended consequences that drive activity in one direction or another. For

example, just to caricature it, if you had a design where all the deposits were in the ring-

fenced bank and all the lending happened out of the non-ring-fenced bank, all sorts of

distortions would come into play. You have to have flexibility on at least one side of the

balance sheet, and we have flexibility on both sides of the balance sheet, so I strongly believe

there would be no incentive for an artificial puffing up of one kind of activity or starving of

another. That also relates to the diversity point that Lord Lawson made.

Remember that we are trying to get the taxpayer off the hook on both sides of the fence,

not more on the hook on one side and less on the other. That is why we had a package of

structural, capital and other measures. I hope we are not distorting things, as you say.

Q811 John Thurso: All that the Bill at present mandates is deposit taking at one end

and proprietary trading at the other.

Sir John Vickers: I think wider than proprietary trading.

John Thurso: It is all trading.

Sir John Vickers: Dealing in investments as principal. It is much, much wider.

Q812 John Thurso: That was my question. How important is it to you, for a faithful

reproduction of your recommendations, that it is not simply confined to proprietary trading,

but the whole of trading? You can have deposits or trading, but you cannot have both.

Sir John Vickers: Fundamental. It is not just trading. That is the excluded activity in the

legislative scheme, but there is also a provision for what are called prohibitions, so that in

secondary legislation, other things can be kept out of the ring-fenced entity. That is very

important too.

One translation of the question is, why did we not go for Volcker, which is a ban on

proprietary trading? There are two differences between Volcker and us. First, Volcker is a

total ban of what he carves out, whereas ours is simply saying that it cannot be in the ring-

fenced entity. The other difference is that we are keeping, on our scheme, a much wider array

of things out of the ring-fenced retail bank than would happen on the Volcker proposal. That

was because we wanted to give the retail bank insulation from a much wider array of risks

than merely those associated with proprietary trading. It is because of the resolution benefits

that we think flow from that, and it is because it allows higher capital requirements for the

retail bank than for the things involved in international banking. If you carved out only

proprietary trading, you would be stuck in a dilemma: do you have high capital requirements,

or not? If you do for everything but proprietary trading, you really would risk damaging some

institutions in the City of London in those terms.

Q813 John Thurso: From what you have said, there are two points that need to be

explored. First is your comment about household and SME loans. Clearly, the core concept of

a retail bank is that it has deposits on one side and, hopefully in a fairly prudent manner, it

lends them out on the other side, usually as SME loans and household mortgages. Wouldn’t it

be fairly mad to have a bank that constructed itself such that those activities were split; in

other words, it ring-fences the deposits, but all those loans are being done in the un-ring-

fenced part? Would that make any sense?

Sir John Vickers: Sorry. You said, “Would it be fairly—”

23

Q814 John Thurso: Wouldn’t it be fairly odd?

Sir John Vickers: Yes, it would be odd.

John Thurso: If only the deposits were ring-fenced and all the loans—the traditional

other side of the balance sheet in banking activity—were in a different entity, i.e. not in the

ring fence.

Sir John Vickers: I completely agree. I think the very natural outcome will be that the

overdraft side will totally be in the core services part, the mandated part. Regarding the

lending to SMEs and households, I think it would be highly natural for that to come from the

ring-fenced entity in large part. Not necessarily all of it—there may be some kinds of lending

that come from the other side—but on that, we have this range of flexibility for the bank. I

think the completely natural outcome will be as you described: not the odd thing, but the

natural thing.

This is one reason why I would keep an eye on the non-EEA assets that the ring-fenced

entity could hold. You do not want a situation where it loads up on those. It is things like, “US

mortgages look nice at the moment.” I am painting an absurd picture, but you could get the

odd result you described there. So I would be alert to that, in part for that reason.

Q815 John Thurso: The other point, which has been put to us by a number of people,

is the ability to sell relatively straightforward derivative products to SMEs as part of their

normal trading—either foreign currency or fairly straightforward hedges on interest rates.

Could those fall either side of the ring fence?

Sir John Vickers: On the scheme we set out, which is still, on balance, the scheme that

I would favour, let us take an SME customer who has a relationship with a ring-fenced bank.

That is where they go for their banking services. They are doing some business where they

want a foreign exchange hedge. It seems perfectly reasonable that they can buy that product at

the ring-fenced entity, but a separate question is whether the ring-fenced entity is selling that

off its own book—

Q816 John Thurso: The question is whether it is manufacturing the product and selling

it, or just simply selling a product manufactured by somebody else.

Sir John Vickers: I think that it is a perfectly fair way of putting it. I may be wrong on

the statutory scheme, but it seems to me that you would need an exemption from the

exclusion of activities that deal in investment as principal to allow the ring-fenced entity to

sell that off its own book, as distinct from on an agency basis. I think that is a complexity that

one does not need.

Q817 Chair: So how do we know which is which? How do we know when this

derivative is being traded?

Sir John Vickers: That is a question for regulation and supervision.

Q818 Chair: But it is not a cake walk, is it? It is a very tough question.

Sir John Vickers: No, but if you allow it for simple derivatives, the question is, “Was

that a simple one or a complicated one?” I think that is a much harder how-do-we-know issue

than the binary question of whether they are selling it off their own book or not.

24

Q819 John Thurso: The core problem here is that, quite rightly in many ways, you

have said that we want absolute clarity on what cannot be permitted to be in the same thing,

but it is actually quite hard to place the exact point, so we will leave lots of flexibility. That all

puts it into secondary legislation, as we discussed earlier, and the secondary legislation is all

going to be written, put forward and promulgated by the exact same rocket scientists who

gave us the tripartite system. Should we not actually be looking a bit harder at trying to give

them a bit more direction on some of this stuff?

Sir John Vickers: Can I just clarify, is that a question about the secondary legislation to

give effect to the Government’s proposals as laid out in the succession of White Papers or are

you suggesting that there should be less flexibility in the middle region?

Q820 John Thurso: I am looking at the draft Bill, which is basically a series of Henry

VIII clauses. It is a mass of enabling legislation. All of the secondary legislation is going to be

written by the genii of the Treasury and will get the customary intense scrutiny that

Parliament gives such things, so they will all drift through pretty sharpish. The real point here

is that actually whoever writes that will end up with it. Can we afford to trust those people,

given that they are broadly the same people who designed the tripartite system?

Sir John Vickers: First of all, I am not sure at all that they are the same people.

John Thurso: But you know what I mean.

Sir John Vickers: That is an empirical question, but I doubt it. They are armed with a

300-and-whatever-page report, which has undergone a lot of scrutiny. The secondary

legislation will be subject to parliamentary scrutiny, so I am more optimistic than some on

these two.

Q821 The Lord Bishop of Durham: Forgive me, but this is a purely clarificatory

question. You are saying that a ring-fenced bank could act as an agent to sell derivative

products to the SME sector.

Sir John Vickers: Yes, for example.

Q822 The Lord Bishop of Durham: Could those products have been manufactured—

to use John Thurso’s term—in the non-ring-fenced bank within the same group?

Sir John Vickers: Yes.

Q823 The Lord Bishop of Durham: So you could have an absolutely massive quantity

that is essentially still within the same group?

Sir John Vickers: Well, I am not sure what the scale would be. It would have the

advantage over the situation where the manufacturing happens in the ring-fenced entity that if

the bank needed to be resolved, this derivative book would all be outside the ring-fenced part

of the bank. It would also have the regulatory advantage that you would not need to keep

saying, “Is that a simple hedging product? Is it complicated? What is the grey area?” It would

just be simpler in those terms.

Now, as your question points out, it would not banish all risks of mis-selling. There may

be some commission arrangements and the rest. I am not suggesting that all wickedness

comes from dealing off your own book. It would not solve that problem totally, but it seems

simpler to me. I know that Andy Haldane was wanting simplicity. Here is an example of

where that might be attainable.

25

Q824 Mr Love: May I take you back to the very detailed response you gave to Pat

McFadden on the five issues, some of which you were fairly relaxed about, but some of

which, even in subsequent answers, you expressed a lot of concern about? I am trying to get

an overall picture of how concerned you would be about all the Government’s changes to

your report going ahead. Do you think that, cumulatively, they add up to a great deal more

than each of them individually?

Sir John Vickers: On any view, the Government’s legislative intentions, not just in the

enabling Bill but in the sequence of White Papers, consultations and so on, are a full

implementation of what we proposed. It is not in every particular, and we never expected that.

When we concluded after 15 months’ work, we did not seek to prescribe every detail, and

what we were proposing needed, of course, to be subject to consultation and so on.

The leverage point does concern me, but I am aware that it is in a very imperfect

international setting—

Q825 Mr Love: You have mentioned how critical this was to the last crisis. We all

know that we are not fighting the last crisis—we are thinking about the next one—but don’t

you think it will be an important consideration?

Sir John Vickers: I do. In part, because one does not know what the next crisis is going

to be like, capital is a really good thing to have in the system because it absorbs losses

whatever the type of crisis, to the extent that you have it. That is something to look at.

On non-EEA assets in the ring fence and on the global scope of loss-absorbing capacity,

I just think that those are ones to watch. I certainly do not think that they are a coach and

horses through our design. I am absolutely not saying that, but I thought you might be

interested in the differences, so I had a little list in my mind on that. We could also talk about

the differences between Liikanen and the UK approach, if anyone wished to. I am not unduly

concerned, but I would flag up those points.

Likewise on de minimis. There, I do think that the Government are right, though £25

billion of mandated deposits is not that minimis.

Q826 Mr Love: Let me just focus on one of those: the exclusion of certain overseas

assets. What do you think about the consequences? What I am worried about is the debate you

had a minute or two ago about simple derivative products turning into complex derivative

products, and Martin Taylor mentioned the thin end of the wedge in relation to that. Could the

exclusion of certain assets turn out to be the thin end of the wedge?

Sir John Vickers: Something that is not difficult to regulate is the question of whether

the ring-fenced entity has non-EEA branches or subsidiaries. There might be issues

concerning the Crown dependencies, but that ought to be fairly straightforward, and I think

that the Government have said, in large part at least, that they would not envisage the ring-

fenced entity having that.

There is an inherent difficulty in relation to the location of a customer. Is it where the

customer is headquartered? Is it the law under which the contract is signed, and all the rest of

it? There is something inherently difficult in that area, but I think that it would be contrary to

our scheme if one ended up with a situation with a UK retail bank with a big chunk of balance

sheet in US mortgages. That is certainly not what the intention has been.

26

Q827 Mr Love: You mentioned earlier the importance of capital. We have had a

number of submissions—indeed Andy Haldane, when he came before us, spoke about it—

about the different tax treatment of equity and debt. Do you think that that’s an important

issue and, if you do, why did it not appear in your final list of recommendations?

Sir John Vickers: It certainly appeared in our analysis. It didn’t appear in our list of

recommendations because we thought it would have been overreach on our part to make a

pretty fundamental recommendation about an aspect of taxation policy. I think it is one of the

reasons why the banks are very reluctant to issue more equity, and why they favour highly

leveraged structures.

Another, perhaps even more powerful, reason is that, particularly when we have had a

period of banking distress, if banks issue more equity, insofar as that gets the taxpayer or debt

holders further off the hook, part of the gain of the greater equity goes to those other groups,

which is socially desirable but perhaps not in the private interests of the banks issuing the

debt. I would put this tax differential point as one of a number of reasons, and not the sort of

reason that, if one could fix it, the problem would go away. It would still remain.

It is also more complicated than it appears on the face of it, because you need to think

how the corporate tax system interacts with the personal tax system to see what the net effect

is through the piece as a whole. So it is complicated.

Q828 Mr Love: I won’t ask you whether you believe we should be more ambitious and

recommend this. I will leave that to our deliberations. May I ask you finally about the implicit

guarantee? You have talked a lot about getting the taxpayer off the hook. Where do you think

we are in relation to the Government’s Bill? Will it get the taxpayer off the hook? Do you

think that the changes are a setback to getting the taxpayer off the hook?

Sir John Vickers: The changes meaning?

Q829 Mr Love: The ones the Government have introduced from your report.

Sir John Vickers: I would not say in a major way. Again, top of my list would probably

be the leverage point. It is cumulative. The whole thrust of the international reform agenda, so

far as it has got, has been trying to do this, among other things. So there is the Basel process

itself, which is more capital, better quality capital, work on the risk rates. I think it is very

interesting that, despite the Liikanen remit being about structure, the Liikanen group—and I

really welcome this—said important things also about loss absorbency. There is the bail-in

debate and policy moves around the world and here. There is all the work on resolution, and

structural reform in the UK, in the US through Dodd-Frank and Volcker, maybe in Europe

following Liikanen. So cumulatively, I think these are a set of very important steps. I do think

the banking reform Bill is a major step within that. It makes a very substantial difference on

top of all the other things that are going on, but I wouldn’t want to do down the importance of

those other things, because they are very important too.

Q830 Chair: On the value of the taxpayer guarantee, the purpose of your proposals is

to reduce it, to reduce the size of the exposure of the taxpayer.

Sir John Vickers: A purpose.

Q831 Chair: The primary purpose.

Sir John Vickers: In a sense the primary purpose is improved banking stability and

competition.

27

Q832 Chair: If you improve stability enough, you arrive at a point where the taxpayer

does not have to pay anything out.

Sir John Vickers: I agree. It is maybe even a litmus test of whether one has done it or

not. But I would not say it is the aim.

Q833 Chair: Okay. On a spectrum, how far across have we moved from levels of

exposure without your reform and after your reform?

Sir John Vickers: And in conjunction with the wider reform initiatives. It is hard to

answer that for a number of reasons. One is that the size of the implicit guarantee also

depends on how uncertain the world is outside: at times of heightened uncertainty the value of

the implicit guarantee is greater than when things are calmer. So it is an interaction that goes

outside the bank. Obviously there are eurozone issues as well. I think a decent start has been

made. This legislation will build on that, but there is a long way to go.

Q834 Chair: But I am trying to get some sense of the proportion. Is it a quarter, or a

half, or three quarters? I am not pinning you down to a close percentage, I am just trying to

get a feel. We are going through all this legislative activity. You have spent a long time

looking at it. We are having a good go. Everybody else is having a good go. What’s it worth?

Sir John Vickers: I think it is worth a huge amount.

Q835 Chair: In terms of its share of the value of the implicit guarantee?

Sir John Vickers: It is the sort of question one would need notice of, and I am not going

to be given notice, so let me try—

Q836 Chair: You were asked it by me in the public session a year ago, so you have had

a year to think about it, [Sir?] John.

Sir John Vickers: Among other things. Were we on a path to somewhere in a few

years’ time where we have the primary legislation, the secondary legislation, the banks have

done the ring-fencing, the Basel capital pots have been filled, and the UK going above that

has been achieved, I would say that would take us most of the way.

Q837 Chair: Three quarters?

Sir John Vickers: I was going to say 80%, so let us call it three quarters. Where we are

now, and we have had greater uncertainties hit us with the eurozone crisis, we might be a

quarter or a third along that path.

Q838 Chair: Since the Government has justified the bank levy on the grounds that it is

a rough quid pro quo for the fact that there is value to the implicit subsidy, the logic must be

that the bank levy needs to be proportionately reduced. Indeed, that is a point that has been

made by a member of your Commission—Bill Winters—in an interview in the Financial

Times last year. Do you agree with that view?

Sir John Vickers: I think the best estimates of the implicit guarantee are considerably

greater than the value of the bank levy as things stand.

28

Q839 Chair: So the bank levy should really be much larger on your recommendation.

If the Government’s logic is correct, the bank levy should be a larger sum. So the bank levy is

a token payment.

Sir John Vickers: No, I don’t think that follows. It is an amount of money that one

could not reasonably describe as token. I think the way to cure the “too big to fail” problem,

which is the other side of saying the implicit guarantee problem, is a set of reforms on capital,

liquidity, structure and all the rest of it. I do not think that changing the levy from this number

of basis points to that number of basis points does that job.

Q840 Mr McFadden: I just want to follow up on something that Lord Lawson said. He

asked you where else in the economy we could look to find something that looked like your

model of ring fences within companies and you mentioned the utility sector. Could you be a

bit more specific? Where else does this exist and where can we look at how this might work—

the kind of thing you recommended in your report?

Sir John Vickers: You do have examples in the banking sector. I mentioned the

Santander UK case earlier. I mentioned Wessex Water and Enron, because that was such an

extreme, colourful case of this kind of structure working in a situation of great stress at

parental level. More generally, subsidiaries work. It is an absolutely standard kind of

corporate structure. This would be a special one, because there is so much public interest in

the integrity of that boundary, or that fence. If appropriate duties are attached to that, as is

proposed in our report and the things that the Government has said, I believe that is very

much achievable.

Q841 Mr McFadden: Are you saying we are making this all a bit too difficult and if

we want to know what this looks like, we should look for any conglomerate that owns three or

four different types of business?

Sir John Vickers: No, that is why I emphasise the particular public policy importance

of this. I believe it is absolutely realistic, achievable and workable. It is very important that

there is heightened awareness of all the issues, because, without vigilance, there is

permeability and erodability, but I think there is every prospect that this would work.

Q842 Lord McFall of Alcluith: Could I add to that? The banking sector, Sir John, is

different from the water industry, and it is the interconnectedness and complexity of the whole

thing. If I remember correctly, Tim Geithner, who went on to become US Treasury Secretary,

said in 2006 that the banking system was safer than ever. There is no individual who knows

individual institutions as much as Geithner; hence he becomes US Treasury Secretary. But he

was clueless about the interconnectedness of the whole issue. We are really talking about

banking as being a special case, so I put it to you that it is an invalid comparison to compare

banking to the water industry.

Sir John Vickers: Oh yes. I was not making a wider comparison. I was trying to

address particularly the ring fencing point. That very term was used when Enron acquired

Wessex Water. Ofwat commented on that, and they spoke very much in those terms. I do not

know what Tim Geithner said at that point, but I completely agree about interconnectedness.

One of the most terrifying things of the crisis, to my mind, was how the shocks, instead of

being absorbed, cascaded and amplified through the system from institution to institution and

within banks.

A lot of the structural aspects of what we are proposing, as well as the loss absorbency

ones, are absolutely on point. You do not want a situation where UK high-street banking is

29

put at risk because some derivative is based on some sliced and diced mortgages in a

completely different part of the world. Likewise, some of the restrictions on our scheme on

the lending that the ring-fenced entity can do—it cannot have financial exposures to other

kinds of financial institution. Nothing is perfect, but it addresses some of the feedback loops

from shadow banking through into retail banking, which hit last time.

Q843 Lord McFall: I suggest to you that it gives more merit to Lord Lawson’s

comments on directors of holding companies.

Sir John Vickers: Yes.

Q844 Lord McFall: Okay, fine. That is good.

If we are writing a report in a next few months, what should we say about yourself? “Sir

John Vickers has said that he has solved the too-big-to-fail problem by 80% and in terms of

implicit guarantees, he is confident that he is almost there.” Would that be fair?

Sir John Vickers: No, that wouldn’t be. My three-quarters remark—80%—was, first,

not about where we are now, but about where I hope we are on a credible path to get to. It was

about the entire set of international and UK measures taken together. I was claiming that the

structural reforms—and now we have a European debate, not just a UK debate—are a very

substantial element of that. I was absolutely not claiming—

Q845 Lord McFall: What if we said that it was part of a wider jigsaw puzzle and you

have contributed to it?

Sir John Vickers: That would be very congenial from my point of view. I would hope

you talk about the ICB and not one individual, when you make these claims. When I speak of

the ICB, I do not just mean the fellow commissioners, but also the wider team.

Q846 Lord McFall: Did you give any study to smaller pieces of banking? For example,

did your commission look at financial stability with a bank with assets no greater than the

annual GDP of a country? In other words, is the complexity and size of banks too complex?

Sir John Vickers: In a sense, we looked at both dimensions, because the higher capital

requirements are a function of size, but the structural reforms are also getting at the issue of

complexity. We did think about the de minimis question and, as I said, had this, “On balance,

we are not persuaded.” That would have meant this regulatory apparatus attaching to all sorts

of institutions, and I think I now am persuaded that that would be disproportionate in relation

to some of the smallest institutions. Again, I wonder whether £25 billion of mandated deposits

is not too high a hurdle in that context.

Q847 Lord McFall: In UK law, there is a definition of “contract” and of “tort”, but

there is not a definition of “ring fence”. Is there an issue here that we should be concerned

with as a commission? If you define it, it could open—

Sir John Vickers: But haven’t the parliamentary draftsmen dealt with that in this

framework in speaking of the ring-fenced body?

Q848 Lord McFall: The parliamentary draftsmen do not always get it right, which is

why I am asking if you have thought about it.

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Sir John Vickers: Well, nothing that I read in the draft legislation troubled me on that

front. Tort is a common law concept, and here we are talking about statutory provision.

Q849 Lord McFall: If you have the ring-fenced company and the non-ring-fence

aspect—let us say that it is a banking group and an investment group—what is to stop them

from engaging in transactions where UK or EU regulation does not apply? For example,

company x in Cayman and company y in the Virgin Islands facilitating a transaction with the

banking group and the investment group in the same organisation.

Sir John Vickers: That is exactly why we had recommended prohibitions on non-EEA

exposures and on exposures to other kinds of financial institution. On our scheme, that would

have been caught not once but twice, and so you could not have ring-fenced bank exposure to

that.

Q850 Lord McFall: So, what the Government are proposing just now could be a

serious breach in the levee? That is really what you are saying here.

Sir John Vickers: I believe the issue will be taken care of, but I think it is an important

one to be alert to. I have no reason at all to think that the Government’s intention is to allow

that kind of thing to happen—on the contrary. However, it will be important to scrutinise the

secondary legislation to make sure that such things cannot happen.

Q851 Lord McFall: This is my last point. I was just reading an article on Wilbur Ross,

who is a billionaire investor in the United States. The United States goes beyond us in terms

of the debate about separation, too big to fail and complexity. He said: “Think about a

Citibank—myriad, complex businesses, each of which is difficult to understand, each of

which has different risk matrices. And then compound that by an infinite amount of

geography, languages, different regulations, different customs and different markets. It’s a lot

of complexity to have in any one organization, regardless of how well-run it is.”

Mr Andy Haldane, in evidence to us, said he came across the issue of complexity of the

products in banks—for example, mortgage-backed bonds and CDO squared. He said there are

150 mortgage-backed bonds in every CDO, 125 CDO bonds in every CDO squared, 200

pages in every bond prospectus, 300 pages in every CDO prospectus—3,787,800 pages to

read. So what message have you got for the ordinary person on the street that what you are

proposing and what is happening in banks just now is a manageable risk, not a black box?

Sir John Vickers: I would say that the ring-fencing idea goes to many points, including

that. The short statement would be, you do not want your high street bank doing that sort of

stuff, and, in this scheme, it would not be allowed to.

Q852 Chair: You have referred, on a number of occasions, to Liikanen and put him in

as part of a package of measures being undertaken. However, Liikanen is at a much earlier

stage than your proposal, isn’t it, and may well be watered down.

Sir John Vickers: Or up.

Q853 Chair: It might not even happen at all, judging by the way legislation is made in

the EU. I take it that you would agree that we would be imprudent to rely on Liikanen going

ahead. We should get on and sort ourselves out as the UK anyway.

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Sir John Vickers: I absolutely agree. That said, I believe that Liikanen is broadly very

consistent with the UK approach, but I would very much hope that the UK Government and

Parliament will press on.

Q854 Chair: You will have no doubt come here with a few things in mind that you felt

you wanted to get across and you have probably got them all across. Is there anything else

that you want to add, given that the report of your commission, if I can call it that, is so

central to our work between now and Christmas?

Sir John Vickers: Nearly every point has come across. As you have mentioned

Liikanen, may I add a point or two on that?

Chair: Yes.

Sir John Vickers: The similarities are quite striking to me. He does not use this term,

but it is a kind of ring-fencing, looked at from the trading side—the tigers, rather than the

retail and deer park side. The UK proposals go considerably further than baseline Liikanen,

but one of the Liikanen provisions is that for the sake of resolvability, if further structural

reform is necessary, he absolutely envisages that. One aspect that is not consistent between

Liikanen and the UK is that he has securities underwriting on the non-trading bit of the fence.

That is one of the surprises to me, given the rest of the scheme. It would belong much more

naturally on Liikanen logic, never mind UK logic, on the trading side of the fence, for all sorts

of reasons that I could or could not go into.

The other point I make is that Liikanen was facing a different question from us. We

were making recommendations for the UK Government and Parliament against the factual

background of UK banks, which are huge in relation to GDP. The UK had a bad crisis and so

on. Liikanen was looking at the EU as a whole, which has tremendous diversity and is a very

different system. Likewise, Volcker was making his recommendations for a very different

banking system. In the US, a pre-existing set of structural separations of a kind are laid out in

a submission I think you have had from a US law firm called Davis Polk, which set it out in a

very interesting way. That is one reason why I said that you have to think of Volcker as an

addition to that legislative and regulatory structure. In the UK we are starting with a much

cleaner slate.

Chair: Thank you very much for coming to give evidence this afternoon. It has been

extremely helpful to us all. We will take forward this inquiry on your proposals pretty

intensively over the next few weeks.