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Mixed Reaction To UK Banking Report

by Robin Pilgrim,, London

16 September 2011

The UK’s plans for a shake-up of its banking system are expected to have a far-reaching impact on the way banks operate in the future, with proposals to ring-fence the retail and investment sectors generating concern over the challenges reform will represent.

The Independent Commission on Banking released its final report earlier this week, detailing recommendations including the isolation of a bank’s retail operations from its investment activities, in an attempt to shield taxpayers from involvement in any future banking collapse.

According to the report, domestic retail banking services should be placed inside the ring-fence, global wholesale/investment banking outside, with the provision of straightforward banking services to large domestic non-financial companies either in or out. Also included in the report are suggestions for equity-to-risk-weighted-assets ratios, along with leverage ratios. Independent governance would be required in both the retail and investment banking arms of a bank.

Chancellor George Osborne has already said that he believes the Commission did a “very good job”, and, in particular, addressed the crucial issue of protecting banking competitiveness and the taxpayer alike. Politicians were among the first to come out in support of the measures, with Labour opposition leaders also hailing the recommendations. John Denham, shadow business secretary welcomed the report, arguing that its proposals are “a step in the right direction in addressing the problem of bank failure”. Shadow chancellor Ed Balls added that “the ring-fence is a tough and radical proposal. It is right that banking services for individuals and small businesses should be protected”. Osborne has made it clear the government will now get on with implementing the report.

Financial experts are clear that, were the government to press ahead with the implementation of these reforms, it will change the face of British banking. According to Andy Baldwin of Ernst and Young, were the recommendations implemented in full, “it would be the boldest regulatory step taken in Europe in this arena”. The report is recognised as “game changing” by Jon Pain, co-head of KPMG’s Regulatory Centre of Excellence in Europe, and Andrew Gray, UK banking leader at PwC said that it “will have a far-reaching impact on the way banks operate in the UK in future”.

Perhaps unsurprisingly, the ring-fencing proposals have generated a great-deal of interest. Many, including KPMG, Deloitte and the CBI, have warned of the additional costs and challenges ring-fencing will bring, with KPMG noting that to comply with the ring-fencing requirements outlined, banks will need to fundamentally overhaul their business models. Pain added that: “Essentially banks will need to create another bank within their bank with new boards and systems”.

CBI deputy director-general Neil Bentley urged the government to consider how any such changes will affect the UK’s international position. He said that “the UK is going it alone on ring-fencing, so the government must rigorously examine how and when to implement these proposals, otherwise it risks damaging businesses and threatening growth”. Bentley also warned of the extent to which the capital requirements suggested in the report ought to be pressed. He said that they are “out of step with internationally agreed measures underway, so will increase the cost of lending for UK businesses, putting them at a disadvantage to their overseas competitors.

His comments echo those given by the British Bankers Association, which said that the European and global financial community is already in the process of implementing reforms. According to the BBA: “Any further reform measures adopted by the UK authorities need to be carefully analyzed and compared with those agreed internationally. It is vital that the full impact any further reforms will have on the economy, the recovery and banks’ ability to support their customers in the UK is understood.”

In spite of such warnings, John Vickers, chairman of the Commission, remains certain that the recommendations should create a more stable and competitive basis for UK banking for the long term. He hopes to see the establishment of a banking system that “is much less likely to cause, or succumb to, financial crises and the huge costs they bring; is self-reliant, so that the taxpayer is never again on the hook for losses that banks make; and is effective and efficient at providing the basic banking services of safeguarding retail deposits, operating secure payments systems, and efficiently channelling savings to productive investments in the economy.”

If the government does indeed implement the report, banks will have until 2019 to introduce the necessary changes.

TAGS: investment | economics | business | law | banking | financial services | United Kingdom | standards | regulation | services

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