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Current issues: Banking reform

The UK banking sector is set to experience “fundamental and far-reaching” changes following the publication of a report from the Independent Commission on Banking (ICB), chaired by Sir John Vickers.

The report recommends that UK banks should ring-fence their retail banking operations from their investment banking divisions in order to protect retail customers and taxpayers. The ICB believes the move will “make it easier and less costly” to sort out banks that might get into trouble. The report does not advocate total separation, because the Commission believes that a strong ring-fence can achieve the same stability benefits at a lower economic cost. Ring-fenced institutions should have independent boards with independent directors and a separate chairman. The ICB believes that ring-fenced banks should be the only businesses allowed to provide core domestic retail banking services.

The measures aim not only to safeguard the UK financial system and its customers – not to mention the taxpayers that bear the cost of expensive bailouts – but also to promote competition. At present, the retail banking sector is dominated by the four biggest players, who administer 77% of personal current accounts. The report suggests that Lloyds might “substantially enhance” the planned sale of at least 600 of its branches – which has to take place by November 2013 – in order to assist in creating “a strong and effective new challenger” on the UK high street.

The ICB believes that, in order to achieve stability in future, UK banks should also have a larger capital ‘buffer’ in place than the 7% demanded by the Basel Committee on Banking Supervision. Looking ahead, all UK banks will require a cushion of at least 10%, but the biggest banks will need a buffer of between 17% and 20%.

The Investment Management Association welcomed the report, commenting, “The arguments for separating retail banking from global wholesale and investment banking are sound” and describing the recommendations as “A thoughtful policy approach for protecting taxpayers from the potential damage of another banking blow-up.” However, the British Bankers’ Association urged the UK authorities to ensure that the full impact of the measures is properly understood. Meanwhile, the Confederation of British Industry warned that the planned changes would increase the cost of borrowing for UK businesses, although the ICB believes that “ring-fencing will strengthen, not weaken, the framework for the supply of bank credit to households and businesses in the economy.

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