Bloomberg News

Vickers Leaves U.K. Lenders Exposed to Shadow Banks, Niesr Says

February 03, 2012

Feb. 3 (Bloomberg) -- Proposals by John Vickers’s Independent Commission on Banking to erect firewalls around Britain’s retail banks do little to provide protection from unregulated shadow banking, a research group said.

The National Institute of Economic and Social Research said rules that Chancellor of the Exchequer George Osborne has pledged to introduce by 2019 will drive lenders toward unregulated banking as they seek cheaper forms of credit. Shadow banks are financial firms that aren’t subject to rules applied to traditional banks.

“The ICB’s analysis is partial and likely to overlook an important potential source of risk,” Angus Armstrong, director of macro-economic research at the London-based group, said in a report today. “In this crisis the shadow banking sector played a critical role in undermining the banking sector.”

The solution proposed last year by the panel led by Vickers, a former Bank of England chief economist, is for banks to build firebreaks between their consumer and investment operations and boost the amount of loss-absorbing equity and debt they hold to between 17 percent and 20 percent. The government’s costs and liabilities for bailing out troubled banks have reached 850 billion pounds ($1.3 trillion) since 2007.

The Vickers proposals are part of the government’s effort to prevent another financial crisis and shield the taxpayer from future bailouts.

Armstrong said lenders such as Northern Rock Plc and Bradford & Bingley Plc, both rescued by the government, were “retail banks with large shadow bank vehicles attached.” He said that while banks are still deleveraging, the shadow banking industry has recovered and is holding global assets of about $60 trillion, as large as it was before the crisis and about half the size of the regulated banking sector.

“More of our retail banking is likely to shift to the shadow banking sector,” Armstrong said.

--Editors: Eddie Buckle, Jim Silver

To contact the reporter on this story: Gonzalo Vina in London at

To contact the editor responsible for this story: James Hertling at

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