British Banking Commission Report Published

[Sheilbh]

And almost everyone's happy with it

Acclaim for banking shake-up plan

There has been widespread support for a government-backed commission that has recommended UK banks ring-fence retail from investment banking.

The Independent Commission on Banking, led by Sir John Vickers, said it would "make it easier and less costly to resolve banks that get into trouble".

The ICB called for the changes to be implemented by the start of 2019.

Chancellor George Osborne said the report would mean UK banks could remain competitive.

"The government wants Britain and the City of London to be the pre-eminent global centre for banking and finance. We want universal banks headquartered here with all the advantages that brings," he told Parliament.

"The global investment banking operations of UK banks can continue to be as competitive as any in the world."

He also said that he planned to stick to the report's timetable.

There was some criticism from employers' group the CBI, which said some aspects of the report would damage the competitiveness of UK banks.

The head of the union umbrella body the TUC said that the report did not go far enough.

Brendan Barber said it was "merely tinkering around the edges of what is one of our absolutely central economic problems", which was how to make banks useful and "get responsible credit flowing again".

The shadow chancellor, Ed Balls, said he was "deeply sorry" for the part the last government played in the regulatory failures that led to the banking crisis.

He described the report as "important and authoritative", while the ring-fence proposal was "tough and radical". But he said it should be "the start, not the end point for reform".

"To help get the economy growing again, we urgently need to increase net lending to small businesses, which the government's deal with the banks has failed to do, and we need action on issues like pay and bonus transparency."

Sir John Vickers said the report was "fundamental and far-reaching".

Separate entities

The report recommends that ring-fenced banks should be the only operations granted permission by the UK regulator to provide "mandated services", which include taking deposits from and making loans to individuals and small businesses.

It says that the different arms of banks should be separate legal entities with independent boards.

ICB main recommendations
Ring fence retail from investment banking
Keep 17-20% of certain assets as "loss-absorbers"
Lloyds branch sale to be opportunity to bring in competitor
New system to help customers switch current account
Reforms to be implemented by 2019 at the latest
Cost to banks of between £4bn-7bn

Another of the ICB's recommendations is that banks must have a buffer to absorb the impact of potential losses or future financial crises - of at least 10% of domestic retail assets in top-quality form, such as shares or retained earnings.

That is a stiffer target than the 7% recommended by the international Basel Committee on Banking Supervision.

It also says the biggest banks should go further than this and have a safety cushion of between 17% and 20% of assets, made up of highest-quality assets topped up with bonds that can be easily converted to equity.

The business lobby group, the CBI said this would not help business.

The CBI's deputy director-general, Dr Neil Bentley, said: "The proposals on capital requirements 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."

The commission also recommends that steps should be taken to make it simpler to switch bank accounts, something that was welcomed by the CBI.

The ICB wants a free current account redirection service to be formed by September 2013, with an improved system to catch all credits and debits going to a customer's old, closed account, including automated payments on debit cards and direct debits.

Costs and benefits

The BBC's business editor, Robert Peston, called it the most radical reform of British banks in a generation, and possibly ever.

He said it would be hated by the biggest UK banks, Royal Bank of Scotland (RBS) and Barclays.

He pointed to the report's analysis of the costs and benefits of the reforms, which estimates the social costs of its proposed reforms - the costs for everyone in the UK, rather than just for banks' creditors and investors - as between £1bn and £3bn a year.

That compares with the annual £40bn cost of lost output that follows periodic financial crises, he said, adding: "If the commission's calculations are even vaguely in the right ballpark, it will be very hard for banks to resist the changes."

The British Bankers' Association (BBA) said banks had already begun the process of making themselves safer.

"UK banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by UK, EU and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained," the BBA said.

'Into the unknown'

Michael Symonds, an analyst at Daiwa Capital Markets, said there was a danger that the changes would damage UK banking's international competitiveness.

"Into the unknown we go, in terms of the recommendations," Mr Symonds said. "The main issue really is the fact that the UK is going it alone on their structural reforms and the potential damage it will do to the competitiveness of the UK banking sector and economy as a whole."

Bank shares all fell sharply in early trade with Barclays, Lloyds and RBS all down about 4% and HSBC down 1.6%, although by mid-morning they had recovered of the ground lost. Bank shares globally were lower on Monday on continued concerns over the eurozone and its debt crisis.

There is a view that regulating UK banks could push some to leave the country in search of a place where regulation is lighter.

Debate in the papers

Commentators are divided over the effect of ring-fencing the investment from retail side of banks.

David Wighton argues in the Times it is a knee-jerk reaction, creating regulation which will "strangle any recovery".

However, the Independent's Mary Ann Sieghart says lending to businesses will be allowed inside the ring-fenced retail arm, meaning the cost of loans will not rise.

In the Financial Times, the former chairman of the Royal Bank of Scotland, George Mathewson, says splitting banks' activities is not the real danger to banks. He says imposing higher capital requirements, which will reduce bank returns and their ability to lend, poses a much greater threat to the UK's economic recovery.

Sir John said he thought this was unlikely, at least as far as High Street banking was concerned.

The ICB was set up last year to look at how taxpayers could be protected from future banking crises.

The credit crisis ultimately led to the government nationalising Northern Rock and part-nationalising Royal Bank of Scotland and Lloyds.

The government now has stakes of 83% and 41% in RBS and Lloyds, respectively.

The ICB said its proposed reforms could result in a pre-tax cost of between £4bn ($6.4bn) and £7bn for Britain's banks, something Sir John said would be unlikely to be felt by individuals.

He said the cost would be about one-tenth of 1% to customers, with the banks themselves absorbing some of the costs.

"How much of this passes through to the customer? It's not going to be a large amount whatever. We believe that most of the cost increase will be felt outside the UK retail ring-fence, rather than within the arena of UK economic activity. We also believe that a portion of the cost increase will be absorbed by the banks, so it won't all get passed through."

[Valmy]

So all political parties are linking arms and singing over this thing?  It was really suck then.

[Sheilbh]

So all political parties are linking arms and singing over this thing?  It was really suck then.

This is what our system does to deal with difficult issues.  Appoint a Commission of respected and fearsome experts, which removes the politics from the proposals and argue around the periphery.  It's why all parties support increasing the pension age (a Blair-appointed Commission), the question is how quickly; or why all parties supported implementing the Beveridge report, but only Labour promised to implement it in full; or the basis of the 1944 Education Act that established grammar schools. 

There's a couple of examples of it not working like that, university funding is a recent one. 

[Admiral Yi]

There's nothing in there that I can see (or in the US reforms either for that matter) that would have prevented the crazy mispricing of subprime mortgage securities or eurozone sovereign debt or the massive exposure to subprime default that AIG assumed.

[Sheilbh]

There's nothing in there that I can see (or in the US reforms either for that matter) that would have prevented the crazy mispricing of subprime mortgage securities or eurozone sovereign debt or the massive exposure to subprime default that AIG assumed.

That's not the goal.  The goal is to make it possible for banks to go bust.  The idea is that if the retail banks are ring-fenced from the investment bank, and have higher capital requirements then the investment bank can collase causing a shock, but not causing a financial crisis that affects personal and business lending so much that the state has to intervene.  The Commission was asked to come up with a solution to 'too big to fail'.

[Admiral Yi]

That's not the goal.  The goal is to make it possible for banks to go bust.  The idea is that if the retail banks are ring-fenced from the investment bank, and have higher capital requirements then the investment bank can collase causing a shock, but not causing a financial crisis that affects personal and business lending so much that the state has to intervene.  The Commission was asked to come up with a solution to 'too big to fail'.

AIG did not have a retail bank component.  Neither did Lehman.

[Sheilbh]

AIG did not have a retail bank component.  Neither did Lehman.

Lehman's wasn't bailed out.  In Britain we didn't have a crisis like AIG.  Our crisis was in universal banks that had enormously leveraged investment wings (such as Royal Bank of Scotland) and had to be nationalised or forced into shotgun mergers.

Edit:  Incidentally the 17-20% figure is similar to the voluntary 20% capital requirement Switzerland's pushed through.  I think that it's right that we're at that sort of level given that we're both small-ish, very globalised companies with an outsized financial sector.

[DGuller]

AIG did not have a retail bank component.  Neither did Lehman.

Other banks down the chain did, though, like BoA or WaMu (remember that one?)

[Admiral Yi]

Other banks down the chain did, though, like BoA or WaMu (remember that one?)

Washington Mutual had an investment banking arm?

[DGuller]

Other banks down the chain did, though, like BoA or WaMu (remember that one?)

Washington Mutual had an investment banking arm?

Never mind about that one.  I was under impression that they were done in by the financial instruments, but quick perusal of Wiki seems to indicate that they just lent too much to the wrong people at the wrong price.

[Admiral Yi]

I wasn't aware BoA did either, until they acquired Merryl post crisis.

[DGuller]

I wasn't aware BoA did either, until they acquired Merryl post crisis.

Well, that's what sunk them.  The toxic shit they bought up would up infecting the real banking.

[Admiral Yi]

Well, that's what sunk them.  The toxic shit they bought up would up infecting the real banking.

I think most of their crap came from Country Wide.

[Richard Hakluyt]

The FT seems to think that the banks are (mostly) off the hook :

http://www.ft.com/cms/s/0/43ba6ef2-cf30-11e0-b6d4-00144feabdc0.html#axzz1XnrU4cjT

Sorry, that link is behind a paywall, unless you access it via Google Finance.

[jimmy olsen]

Sounds good. We should do the same here, but won't.