Katherine Griffiths and Roland Watson writing for The Times
‘The Independent Commission On Banking’ Report In 2011 say…….
Katherine Griffiths and Roland Watson writing for The Times
Britain’s biggest banks have been granted an eight-year period of grace in which to implement far-reaching reforms that will eventually make theUKone of the strictest financial systems in the world. The timeframe, which was longer than expected, caused shares in the Royal Bank ofScotland, Barclays, HSBC and Lloyds to drop yesterday but they did not follow the steep sell-off by European banks, which came on a day of renewed panic over the sovereign debt crisis.
George Osborne endorsed the proposals from the Independent Commission on Banking, which yesterday published its report on how to makeUKbanks safer, almost three years to the day that Lehman Brothers, the Wall Street bank, collapsed. The shockwaves from the crisis put the Royal Bank ofScotlandand HBOS on the brink of failure. TheUKbanks were bailed out with £65 billion of taxpayers’ money and tens of billions more in help with funding and liquidity.
Mr Osborne said that the commission, chaired by Sir John Vickers, the former chief of the Office of Fair Trading, should be congratulated for a “job well done”.
The commission’s estimate that its proposals could cost banks between £4 billion and £7 billion a year was justified on the grounds that they will make banks safer, and reduce the likelihood of taxpayers having to bail them out in the future, the Chancellor added.“The costs should fall on shareholders and debt holders, not small depositors or taxpayers,” Mr Osborne said.
After months of intense scrutiny by the political and business world since it was established by the Government in June last year, the commission reiterated the view, expressed in April, that banks should ring-fence their retail operations and must hold a 10 per cent capital buffer within that division.
Investment operations at banks should remain outside the ring-fence so that in the event of a failure, shareholders and creditors, not taxpayers, should bear the losses, the commission said. The change will affect RBS and Barclays the most as they have large investment banking operations.
In its most surprising recommendation, the commission said that the UK’s largest banks should go further, with a buffer of up to 20 per cent of their assets, a standard that has just come into force in Switzerland.
Sir John fended off criticism that, by setting a 2019 deadline for the changes, banks were being let off the hook.
“Short-termism got us into this mess. We need long-termism to build a more stable system for the future,” he said. He also challenged critics who said that the proposals would hurt the fragile economic recovery because higher costs to banks would filter through into lending to households and businesses. The ring-fence would be both “strong and flexible”, Sir John said, making banks safer while giving them freedom about how to conduct their business. The relatively small costs to banks was dwarfed by the cost of clearing up the mess after financial crises, he added.
However, the CBI, whose director-general, John Cridland, recently said that introducing draconian reforms now would be “barking mad” because of the economy’s weakness, reiterated its caution.
Neil Bentley, the deputy director-general of the CBI, said: “The Government must rigorously examine how and when to implement these proposals, otherwise it risks damaging businesses and threatening growth.”
The details of the proposals allowed the coalition partners to paper over most of their cracks on bank reform. While there will be a final deadline of 2019 for reforms, Vince Cable, the Lib Dem Business Secretary who has been the Government’s most outspoken critic of the banks, insisted that the process would start immediately.
Some early changes are likely to be added to the Financial Services Bill currently before Parliament. Andrew Tyrie, chairman of the Treasury Select Committee, called on the Government to introduce the reforms first with the higher capital standards coming later to avoid a squeeze in lending.
On the competition side, which the Commission was also asked to look at, the five-strong committee softened its previous hard line stance that Lloyds should be forced to “substantially enhance” its sale of branches.
Lloyds, which is 41 per cent owned by the taxpayer, has been ordered to sell-off some of its branches and a 4.6 per cent share of current accounts by the European Union in return for the £20 billion of aid it received during the financial crisis.
The commission reiterated the need for greater competition but suggested a more flexible approach to achieving it. Rather than ordering Lloyds to sell-off more than 632 branches, competition in the market could be boosted by selling to a business that already has a small presence in the current accounts market, making the combined operation reasonably significant with about 6 per cent of the market, the commission said. Or Lloyds could grow the deposit book before the sale to bring it up to 6 per cent. Other competition proposals include making it easier for customers to switch bank accounts without having to set up their direct debits afresh by introducing a free current account redirection service by September 2013.