‘Ringfencing’ the customers: Bankers escape retail-investment split
Banks’ retail banking and investment banking divisions should not be split into “wholly separate firms”, a major review of the financial sector has said.
The interim report of the Independent Commission on Banking (ICB) appears to retreat from the coalition government’s enthusiasm to indulge in “structural radicalism”.
Instead it suggests “a complementary combination of more moderate measures towards loss-absorbency and structure” are worth considering.
The “ringfencing” of a bank’s UK retail banking activities could be implemented by forcing retail banking operations to take place in a separate subsidiary within a wider group.
“It is open to debate whether a retail ring-fence would give more or less banking stability than full separation between retail banking and wholesale and investment banking,” the report found.
“Rather than pursuing more radical policies towards capital or structure, the approach outlined above is a combination of more moderate measures. They nevertheless entail costs to banks, some of which fall on the wider economy, but these appear to the Commission to be outweighed by the benefits of materially reducing the probability and impact of financial crises.”
The commission said it wanted to make banks better able to absorb losses, curb incentives for excessive risk-taking and make it easier and less costly to “sort out” banks which get into trouble.
ICB chairman Sir John Vickers said the ‘ringfencing’ proposal would offer “a great deal of additional protection” in the event of another financial crisis.
“We think it would make a huge difference compared with the situation where you have a totally interwoven, one big amorphous bank,” he told journalists at a press conference this morning.
“We believe this would give a huge amount of additional protection and very importantly reduce the probability that taxpayer resources would be needed [when the next financial crisis occurs].”
The coalition agreement pledged to take steps “to reduce systemic risk in the banking system” and acknowledged the issue was a “complex” one.
Liberal Democrat leader Nick Clegg, whose harsh rhetoric against the City had triggered concerns that the commission could be pushed into more radical moves against the banks, insisted on the Today programme that the status quo was unsustainable.
“It’s not right to have very high-risk and low-risk banking activities so intertwined that when things go wrong it’s the taxpayer that picks up the bill,” the deputy prime minister said. “That is simply unacceptable.”
Labour offered broad support for the report’s proposals, after former prime minister Gordon Brown admitted New Labour’s financial regulation regime had made a “big mistake” in thinking the problem would come from the failure of an individual institution.
“We didn’t understand just how entangled things were,” he told a US conference audience.
Mr Balls said “radical changes” were needed to ensure “the irresponsible actions of banks around the world which caused the global financial crisis” were not allowed to be repeated.
“To protect customers and taxpayers we need tough accountability and transparency and clear, workable and robust firewalls,” he commented.
“The devil will be in the detail of the commission’s final proposals, but we must get this right.”
The ICB ruled out another approach, introducing high capital requirements across the board, and instead proposed that banks should hold equity of at least ten per cent and “genuinely loss-absorbent debt”.
With international standards looking as if they are heading towards the ten per cent requirement, the report shied away from imposing harsher capital standards in Britain.
But it stood firmer on competition issues, expressing concern that, after its acquisition of HBOS, Lloyds now has around 30% of current accounts in the UK.
Selling off a number of Lloyds branches was one of the measures proposed by the interim report to counter the problem, which it suggested was damaging customers’ switching between accounts.
Which? chief executive Peter Vicary-Smith said the report was a step in the right direction, but said concerns remained about banks’ ability to retain “wriggle room”.
“Competition on the high street is at an all-time low, with the three biggest retail banking groups consisting of two that would have collapsed without taxpayer support and one that has a woeful record on customer services,” he commented.
“This is not the template for a market that works well for consumers.
“The financial crisis has increased the market power of the largest banks, leading to a worse deal for consumers. We’re pleased the commission recognised this, but need to consider whether the recommendations will go far enough to address the parlous state of competition in the UK.”
CBI director-general John Cridland offered a more cautious welcome, however, saying that the ICB was right to avoid “breaking up universal banks”.
“Requiring banks to hold ten per cent capital buffers against their UK retail operations will provide an additional shock absorber in the event of a financial crisis, though we agree with the Commission that this would be best done through international reforms,” he commented.
“But the Commission’s proposals on ringfencing could have a significant impact on the UK financial landscape, and will need to be carefully assessed to ensure that they allow banks to support businesses and growth, and strengthen this country’s position as a leading global financial centre.”
The ICB will make its final recommendations to the government by September this year.
“We hope that by laying out the retail ringfence proposal with the clarity you are seeing it in, we are giving a lot of focus to the report,” Sir John added.
“This is a point midway in our process, and with questions of this magnitude and this importance it is extremely important to have public consultation.”
