By Richard Johnstone | 12 September 2011
Banks’ high‑street operations should be separated from their investment arms to reduce the risk of the system needing government bail-outs, a long‑awaited report into the future of UK banking recommends today.
The Independent
Commission on Banking, chaired by Sir John Vickers, former chief economist at
the Bank of England, also
recommends that banks be required to hold greater reserves in an attempt to
resolve the issue of some being ‘too big to fail’.The UK government became the major shareholder in both Royal Bank of Scotland and Lloyds Banking Group in 2008/09, to save both banks from going bust following the global financial crisis.
Vickers’ commission was appointed in June 2010 to examine the reforms needed to ensure greater financial stability in the future.
To avoid what the report calls the ‘government [being] compelled to save big banks for fear of the consequences of not doing so’, the commission recommends that a ‘firewall’ between the domestic retail services and global investment operations of banks be introduced by 2019.
This ‘structural separation’ of a bank’s operations would make it ‘easier and less costly’ to rescue banks that get into trouble, allowing failing banks to bear losses instead of the taxpayer. It would also insulate retail banking from financial shocks.
The report also recommends that large UK retail banks increase the amount of money that they have available to absorb losses from around 2% of the value of their assets currently to 10%. This is higher than the 7% equity standard being introduced as part of reforms to the global banking system, known as Basel III, which will also be implemented in 2019. Banks should have a total ‘primary loss-absorbing capacity’ of at least 17% of assets for all their operations.
These recommendations should resolve the ‘too big to fail problem’, the report concludes. ‘First, the degree of insulation that retail ring-fencing provides for vital banking services, for which customers have no ready alternatives, gives them some protection from problems elsewhere in the international financial system, and also makes them easier to sort out if they get into trouble,’ the report states.
‘Second, greater loss-absorbing capacity – from equity and otherwise – for both retail and wholesale/investment banking means that banks of all kinds can sustain bigger losses without causing serious wider problems, and curtails risks to the public finances if they nevertheless do get into trouble.’
The government welcomed Vickers’ recommendations as ‘an important step towards a new banking system that supports lending to businesses and families, supports the economy and jobs, but doesn't cost the taxpayer billions of pounds when it goes wrong’.
Chancellor George Osborne said that the government would ‘get on with’ implementing the recommendations. He said that he would stick to the timetable outlined in the report of implementing the changes by 2019.
The British Bankers Association said that it was ‘vital’ that any reforms introduced were ‘carefully analysed and compared with those agreed internationally’.
The CBI warned that Britain was ‘going it alone’ on ring-fencing, which could threaten economic growth. Vickers estimated the cost of the reforms to the banks at between £2bn to £10bn, with an average estimate of £6bn.
CBI deputy director general Neil Bentley said: ‘The proposals on capital requirements are out of step with internationally agreed measures under way so will increase the cost of lending for UK businesses, putting them at a disadvantage to their overseas competitors.’
