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Banking Commission urges Govt to ‘electrify’ ringfence rules

Andrew Tyrie BBA Conference 2012 480

The Parliamentary Commission on Banking Standards wants the Government to strengthen bank ringfence rules and introduce back-up regulatory powers to force banks to fully separate their retail operations from their investment arms.

The banking standards commission was set up in July to focus on the culture of UK banks and the lessons to be learned about corporate governance in the wake of the Libor-rigging scandal. It is chaired by Treasury select committee chairman Andrew Tyrie (pictured).

It has also considered the Government’s draft banking reform bill, which implements recommendations by the Independent Commission on Banking for banks to ringfence their retail divisions from their investment operations.

In its first report, published today, the Parliamentary Commission on Banking Standards says the draft banking reform bill needs to go further and wants the Government to “electrify” the ringfence with the addition of reserve powers to implement full separation of retail and investment activities.

The first reserve power would relate to individual companies, while a second reserve power would relate to the banking sector as a whole.

The commission wants to see an independent review carried out on whether the ringfence is effective and whether there is a case for full separation. It has suggested this review be carried out within four years of the ringfence rules taking into effect, and at regular intervals of a maximum of five years.

It has also recommended the Prudential Regulation Authority carries out an annual report on how the ringfence is operating.

The commission has also called for the Government to amend the draft banking reform bill to allow for bail-in powers, where private investors rather than taxpayers are called upon to support failing banks. The commission is concerned these powers should be able to come into force in the UK if negotiations at a European level are delayed.

The commission argues ringfence rules should be supported by tougher capital requirements, including a leverage ratio “substantially higher” than the 3 per cent minimum required under Basel III.

Parliamentary Commission on Banking Standards chairman Andrew Tyrie says: “For the ringfence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to.

“That is why we recommend electrification. The legislation needs to set out a reserve power for separation; the regulator needs to know this power can be used. We also need periodic reviews of the sector to reassure us that the ringfence as a whole is working. Tougher measures may yet be required.”

The commission will produce another report next year looking at whether derivatives such as interest rate swaps should be sold within the retail ringfence. Next year’s report will also consider the changes to be made in areas such as competition, regulation and law that would improve banking standards.

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  1. Having worked for a bank in a traditional role, I agree that tougher ringfencing & control is needed. Otherwise one is confronted with the spectre of aggressively targeted, investment banking spivs (with spikey hair and Armani suits) forcing their rather opaque investment products into areas of traditional banking.

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