Katherine Griffiths writes in the Times
‘The Independent Commission On Banking’ Report In 2011
What are the key recommendations and how will they change the way banks operate?
What are the key recommendations?
UKbanks must create a “ring-fence” around their core operations lending to households and small businesses. The business within the ring-fence must have minimum capital equivalent to 10 per cent of its assets. Banks must keep their global investment banking operations outside the ring-fence. Lending to large companies can be either inside or outside the ring-fence. Big banks must hold equity of up to 20 per cent in total — a level that only the Swiss plan to introduce outside theUK. If the retail bank fails, depositors will be first in line to get their money back.
Will it affect my banking services?
Yes. On the downside, banks will have to pay between £4 billion and £7 billion a year to implement the changes — costs likely to feed through to higher charges for mortgages, credit cards and lower savings rates. On the upside, there are suggestions to improve competition, including a free current account redirection service to be formed by September 2013 to make it easier to switch to a new account.
Why the overhaul?
The Government wants to reform banks so that there is no repeat of the 2008 financial crisis. The hope is that if a bank does get into trouble in future, its key high street operations will be much safer and easier to separate, while shareholders and investors who have lent money to the investment bank will have to bear losses for its failure. While the commission’s proposals will cost money, the bill will be tiny compared with the cost of another crisis, the Government believes.
How will it change the way that banks operate?
The ring-fence will create substantial complications for banks. They will have to set up new legal entities and appoint a board of directors dedicated to ensuring the health of the retail bank, even if that goes against other interests within the group. For example, the retail bank can lend the investment bank money, but only if it believes that it is a responsible thing to do. Its lending to the investment bank will also be subject to limitations.
What’s the timetable for change?
In a development that caused the most controversy yesterday, banks have until 2019 to implement the changes. The timetable brings theUKreforms into line with the incoming international Basel III rules on higher capital and liquidity, but critics said that the timetable over almost eight years is too soft on banks.
Will it hurt the economy?
Banks argue that it will. They have historically benefited from combining retail and investment banking — making them diversified businesses, which investors like, leading to low funding costs.
A semi-separation of banks through the ring-fence will increase these costs. More expensive funding going into banks will inevitably mean that households and businesses will find it more difficult — and expensive — to borrow money. The commissioners disagree, saying that the impact on lending will be limited. They also argue that banks have for too long benefited from an implicit subsidy in their funding because the market believes that the government will always bail them out. That had to stop to ensure that taxpayers are not on the hook when and if things go wrong next time.
Will it hurt the UK’s competitiveness?
Again the banks have said “yes”, arguing that the changes will make theUKthe most draconian regime of the major economies.
They have warned that they may have to move their operations abroad.
Sceptics say that the complexities involved in relocating head offices or major divisions will outweigh the potential gains for banks, and argue that creating one of the safest regulatory regimes in the world is itself a competitive advantage.