Marcus Evans Group | Worldwide Headquarters | American Offices | Latin America | European Offices | African / Asian Offices

UBS shows that Vickers is right to separate utility banking from the casino

If banks cannot implement effective risk controls, it is surely not sensible to trust regulators to be perfect

Rogue traders weren’t mentioned by Sir John Vickers (pictured) when he recommended on Monday that retail banks should be separated from investment banks via a ringfence. Perhaps they should have been. The UBS debacle is yet another reason why plain utility banking should be protected from the too often wild events in the casino.

A loss of bn (£1.26bn) is not big enough – thankfully – to topple UBS, or even make a serious dent in its core capital. But the episode illustrates the folly of believing the cries from the anti-Vickers lobby that the Independent Commission on Banking has been guilty of overkill.

That mistaken argument runs as follows: the UK’s banking crisis was only so severe because Royal Bank of Scotland (RBS) was so big. RBS’s greatest mistake, conducted in full sight of regulators, was to run down its capital cushions in order to buy ABN Amro. So why force all UK banks to perform expensive restructuring in response to one rotten deal? Why not let bigger capital cushions and better regulation make the system safer?

The answer should be clear. If UBS, even after its own disasters and bailout during the banking blow-up of 2007-08, cannot implement effective risk-controls, it is surely not sensible to trust regulators to do their jobs perfectly.

Equally, it would be absurd to tolerate a situation in which a UK retail bank, after a heavy loss incurred by its in-house investment bank, was obliged to trim essential lending to the UK economy to compensate for traders’ bad bets, whether authorised or not.

Without reform, investment bankers are always likely to win any competition for capital within a broad-based bank. Their business is about bonuses, short-term profits (and losses) and the prospect of instant glory.

Retail banking, on the other hand, is lower-paid and involves long-term judgments about risk – but it is vital to the economy.

Vickers is right. Let’s get those ringfences erected.’ © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds