Critique of the Report on the Economic Consequences of the Vickers Commission. The Report on the Economic Consequences of the Vickers Commission (RECVC) underscores the fatal flaws the Vickers Commission's report is riddled with. It proposes an alternative solution to the instability of our financial markets: Limited Purpose Banking (LPB). To quote the RECVC, LPB "replaces 'trust me' banking with 'show me' banking" (12). The entire structure of LPB relies on mutual funds, and for good reasons. Mutual funds tend to be unyielding to economy-wide financial fiascos. The main underpinning concept behind this is that they promise no assured returns. This accurately reflects the true nature of financial markets, as they are inherently indeterminate. And even in such an uncertain realm, today's banks create a false sense of security by proclaiming guarantees against any loss to creditors. Such a system produces intended results as long as the market performance is in line with bankers' expectations. However, given its intrinsic susceptibility to fluctuations, unexpected outcomes are the norm. And when this happens, banks are unable to fulfill their promises, thereby freezing the entire financial system and causing a systemic meltdown. Mutual funds mitigate any such risk by explicitly claiming likely variabilities in asset values. Such a disclaimer would never make them liable for any losses, thereby averting the threat of institutions going under. The solution proposed by the RECVC also targets the issue of opacity, which is another glaring flaw embedded in our financial foundations. The unwillingness of our financial institutions to publicly disclose their holdings makes creditors wary of the slightest of irregularities. The failure of one bank can lead to panic amongst creditors regarding other banks, since no one has knowledge of their true financial status. Collective action on such apprehension consequentially results in bank runs, even if the banks are perfectly solvent. Mutual funds in the LPB framework, on the other hand, would alleviate any such fear by disclosing all the assets people have invested in. This transparency, therefore, would provide a supportive cushion against the reaction of creditors based on unsubstantiated information. Another advantage of supplanting the traditional financial construct with Limited Purpose Banking would be a drastic reduction in leverage ratios. And by a radical reduction, I mean a reduction to zero leverage. Indeed, high leverage has almost always been a culprit of any financial meltdown. Such large leverage ratios are legally permissible primarily due to the low capital ratio requirements set down by Basel III, which necessitates banks to hold only 4.5% of common equity of risk-weighted assets . The statistics from the companies that were hard-hit by the crisis of 2008 enlighten us on the magnitude of the issue. For instance, the FCIC points out that "Fannie's and Freddie's combined leverage ratio, including loans they owned and guaranteed, stood at 75 to 1". Such appallingly leveraged institutions would require only a miniscule depreciation in the value of their assets to render them insolvent. This, however, will not be an issue in LPB, as the "mutual funds, whether open end or closed end, are not allowed to borrow" (12). This would result in a zero leverage ratio, thereby eliminating all risks associated with extensive borrowing. For the skeptical, the RECVC also highlights that veering towards LPB would not deprive us of the essential elements present in our current banking system. It does so by addressing how two such features--retail deposit accounts and insurance policies--could very conveniently be woven into the fabric of Limited Purpose Banking. In fact, not only do the LPB counterparts of these features exist, but they also serve the economy better. Let us, for instance, consider the transition from the existing retail deposit accounts to cash mutual funds. As explained by the RECVC, these mutual fund companies would not be allowed to lend out the deposits of the investors, thereby ensuring that depositors would never lose their money. This simple but powerful solution could alleviate much of the panic in a crisis resulting from loss of creditor deposits. This imposition of a 100% cash reserve would also enable companies to efficiently handle large withdrawals without the fear of insolvency, which is another pertinent issue in the current financial system. Similarly, the current insurance policies would easily be substituted by insurance mutual funds in the LPB framework. Such radical conversions within the financial construct might make us anxious about the potential cracks it could create in our economic foundations. One might also wonder about the time it might take to replace the current system. However, a closer inspection would reveal the nature of a conversion to Limited Purpose Banking as a relatively minor alteration in the economy. Such a transformation would hence be expeditious, not financially onerous, and therefore an effective solution. The report also offers a valid argument against the Vickers Commission's efforts to ring-fence the banking system. The commission proposes a partition between commercial banks (which will engage in safe investing) and investment banks (which may not), vowing to protect solely the former. In doing so, it does not realize that it's introducing even more volatility in these 'bad' markets. The government's refusal to bail out these 'bad' banks will force their investors to be even more risk averse than before, thereby encouraging them to exit at the first signs of trouble. Moreover, we are all well aware of the government's experiment in allowing Lehman Brothers to fail, which led to a cascading collapse of the entire economy. The truth is that within such opacity and uncertainty, the failure of any bank, good or bad, can throttle the entire financial system. Protecting only a part of the system through ring-fencing would, therefore, be ineffective. There are many more reasons akin to the ones above that one could invoke in support of Limited Purpose Banking. There is, however, one particularly pertinent argument in favor of its adoption that the RECVC does not highlight. The basis of this rationale lies in the increasingly globalized outreach of today's companies. The Vickers Commission's ring-fencing proposals focus on insulating core essential banking services from potential losses caused by certain activities, which would otherwise be left intact within a non-retail investment banking structure. In the US, however, the Dodd-Frank Legislation has completely prohibited certain business activities perceived to be too risky. This conflict between the two regulations would pose compliance difficulties for organizations with a global perspective. This only reinforces the need for an alternative, much simpler requirement, which would easily be provided by LPB. Finally, the Vickers Commission also fails to address the obvious conflict of interest of the credit rating agencies. Today, most agencies are paid by the very companies they are meant to rate the assets of. This prevents the agencies from rating them poorly, even if they deserve so. A resolution of the issue, thus, would require functional separation between banks and rating companies. This issue is effectively addressed by Limited Purpose Banking, which would require a government authority--the "Financial Services Authority" (12)-- "to hire private companies working only for it to verify, appraise, rate and disclose, in real time, all securities held by mutual funds" (12). In conclusion, the Vickers Commission fails to address the root causes of the financial crises, and offers only a Band-Aid when a major surgery is required. This is often the case with reports of such nature, which underscores the enormous influence the banking industry has on government policy formulation. Actual solutions often tend to be overlooked, perhaps because they are 'too effective' for the bankers' liking. Given the situation, one can only hope that a viable solution is implemented before we see another catastrophic collapse of the economy.