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Bank reforms aim to get taxpayers off the hook

The Independent Commission on Banking has held firm on its reforms, recommending that banks ringfence retail operations from investment banking and hold capital in excess of Basel III requirements by 2019.

The ICB, chaired by Sir John Vickers, was set up by the Government in June 2010 to recommend reform that would promote financial stability and competition within UK banks.

The final report, published this week, argues that retail banking services such as holding deposits and providing overdrafts to individuals and small and medium-sized enterprises should be ringfenced.

Global investment banking, including services to customers outside the European Economic Area, the purchase of loans or securities and derivatives trading should be outside the ringfence.

The ICB says it is up to banks to decide whether straightforward banking services such as loans to large non-financial firms are within the ringfence or not.

The commission recommends that UK retail arms should meet capital, liquidity and funding rules on a standalone basis, operating an “arm’s length” relationship with other parts of the bank.

It believes the board of each UK retail arm should have a majority of independent directors, one of whom is the chair, and should report as if it were an independently listed company.

The ICB also wants to see large UK retail banks holding equity capital of at least 10 per cent of risk-weighted assets, in excess of the 7 per cent minimum required under Basel III. The commission recommends that banking groups should go further than this with an overall minimum capital cushion of between 17 per cent and 20 per cent, holding long-term unsecured debt or contingent capital that would absorb losses before a bank had to be wound up.

The commission is calling for deposits protected by the Financial Services Compensation Scheme to be treated as a priority, meaning savers would be paid before other unsecured creditors if the bank became insolvent.
It estimates the cost to banks of the proposed reforms will be between £4bn and £7bn annually. It expects the one-off cost of implementing the reforms to be “relatively small”.
The ICB says banks need enough time to act on its recommendations but expects implementation by the start of 2019 at the latest.

In an interim report in April, the commission suggested that the forced sale of 630 branches by Lloyds Banking Group to comply with European state aid rules should be “substantially enhanced” to boost competition.

But in its final report, the ICB stops short of recommending specific enhancements and instead recommends that the Government seeks agreement with Lloyds to ensure the sale results in a strong new entrant to the banking sector.

Speaking in London on Monday, Vickers said: “Structural separation will help insulate vital UK retail banking services from global financial shock. It will also make it easier and less costly to sor out banks that still get into trouble. That is all part of getting the taxpayer off the hook for the banks.”

ICB final report recommendations

  • Retail banking operations to be ringfenced from investment banking
  • Retail arms should meet capital and funding requirements on a standalone basis and operate with an independent board
  • Big UK retail banks should have equity capital of at least 10 per cent and banking groups should have an overall minimum capital buffer of between 17 per cent and 20 per cent
  • Depositor preference for deposits protected by the FSCS
  • Agreement from Lloyds Banking Group that branch sale will result in strong new banking entrant

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