Independent Commission on Banking
On 16 June 2010, the Chancellor of the Exchequer announced the creation of the Independent Commission on Banking, chaired by Sir John Vickers. The Commission was asked to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition, and to make recommendations to the Government by the end of September 2011.
The final report (all 363 pages of it) was published on 12 September, and the recommendations aim to create a more stable and competitive basis for UK banking in the longer term, meaning:
- greater resilience against future financial crises and removing risks from banks to the public finances.
- a banking system that is effective and efficient at providing the basic banking services of safeguarding retail deposits, operating secure payments systems, efficiently channelling savings to productive investments, and managing financial risk.
To those ends the report recommends that there should be vigorous competition among banks to deliver the services required by well-informed customers.
Basel/EU reform
The report notes that the international reform agenda – notably the Basel process and European Union (EU) initiatives – is making important headway, but needs to be supported and enhanced by national measures; and acknowledges that part of the challenge for reform is to reconcile the UK’s position as an international financial centre with stable banking in the UK. Here is an overview of the suggested structural reforms:
Structural reform
The report acknowledges that a number of UK banks combine domestic retail services with global wholesale and investment banking operations; and whilst both activities are economically valuable, both also entail risks and public policy concerns.
The recommendation is to separate retail banking and wholesale/investment banking for the following reasons:
- First, structural separation should make it easier and less costly to resolve banks that get into trouble.
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Second, structural separation should help insulate retail banking from external financial shocks, including by diminishing problems arising from global interconnectedness. The report notes that much of the massive run-up in bank leverage before the crisis was in relation to wholesale/investment banking activities.
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Third, structural separation would help sustain the UK’s position as a pre-eminent international financial centre while UK banking is made more resilient.
What does Sir John Vickers think separation would do?
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Assist the monitoring of banking activities by both market participants and the authorities; and should allow better targeting of macro-prudential regulation.
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Banks’ direct operational costs might increase and, the cost of capital and funding for banks might increase.
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The economy would suffer if separation prevented retail deposits from financing household mortgages and some business investment.
The Ring Fence
The objective of a ring-fence would be to isolate those banking activities where continuous provision of service is vital to the economy and to a bank’s customers.
The aims of insulating UK retail banking from external shocks and of diminishing problems (including for resolvability) of financial interconnectedness imply that a wide range of services should not be permitted in the ring-fence. Services should not be provided from within the ring-fence if they are not integral to the provision of payments services to customers in the European Economic Area (EEA) or to intermediation between savers and borrowers within the EEA non-financial sector, or if they directly increase the exposure of the ring-fenced bank to global financial markets, or if they would significantly complicate its resolution or otherwise threaten its objective. So the following activities should not be carried on inside the ring-fence: services to non-EEA customers, services (other than payment
services) resulting in exposure to financial customers, ‘trading book’ activities, services relating to secondary markets activity (including the purchases of loans or securities), and derivatives trading (except as necessary for the retail bank prudently to manage its own risk).
Subject to limits on wholesale funding of retail operations, other banking services – including taking deposits from customers other than individuals and SMEs and lending to large companies outside the financial sector – should be permitted (but not required) within the ring-fence.
Philip Henson, Bargate Murray.
Related articles
- ICB to admit its reforms will cost banks billions (telegraph.co.uk)
- Bank ring-fencing gets backing from leading investors (telegraph.co.uk)
- Osborne to let banks off the hook – for now (independent.co.uk)
