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Sir John Vickers backs maturity transformation and opposes full reserve banking

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  • Musgrave, Ralph S.

Abstract

Sir John Vickers (Chairman of the UK’s Independent Commission on Banking (2011)), published a discussion paper entitled “Some Economics of Banking Reform” (Vickers (2012)). This is my contribution to the “discussion”, that is, I make some criticisms of the paper. The Independent Commission on Banking is referred to as the “Vickers commission” below, while the word “Vickers” (without an accompanying date) refers to his 2012 discussion paper. Two central points in Vickers’s paper are addressed here. First Vickers defends the existing banking system partially on the grounds that it engages in “borrow short and lend long”, i.e. “maturity transformation” (MT), which Vickers claims brings a large benefit. Vickers makes the standard claim for MT, namely that depositors gain the additional interest that comes from having their money invested in long term loans or investments while still retaining quick access to their money, i.e. liquidity. One flaw in that argument is that MT involves risk, a risk which went wrong around five years ago and would have crashed the world economy far more seriously than it actually did, had banks not been rescued with trillions of dollars of public money. A second flaw in MT is that if it is curtailed, the resulting reduced quantity of money / liquidity can be made good at zero real cost by having central banks issue more money. And that involves no risk of the bank runs, credit crunches and so on that are inherent to MT. Thus the case for MT is badly flawed. The second central point addressed below, in Part II, is Vickers’s claim that full reserve banking or “narrow banking” as he calls it, is defective. The paragraphs below are not supposed to be a REVIEW of Vickers’s paper: to repeat, it is just the above two points made in the paper which are considered here. That is, there are various parts of Vickers’s paper which I agree with, or which I am not qualified to judge.

Suggested Citation

  • Musgrave, Ralph S., 2014. "Sir John Vickers backs maturity transformation and opposes full reserve banking," MPRA Paper 59600, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:59600
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    File URL: https://mpra.ub.uni-muenchen.de/59600/1/MPRA_paper_59600.pdf
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    References listed on IDEAS

    as
    1. John Vickers, 2012. "Some Economics of Banking Reform," 'Angelo Costa' Lectures Serie, SIPI Spa, issue Lect. XII.
    2. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    maturity transformation; John Vickers; full reserve banking; narrow banking.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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