The Independent Banking Commission is looking at ringfencing retail banking and considering how that might affect banks’ ability to wind down with minimal disruption to retail financial services.
In a speech to the London Business School on Saturday, IBC chairman Sir John Vickers ruled out “narrow” forms of banking, where banks work purely as low-risk deposit-taking institutions but he said some separation may be required to allow banks to fail.
Vickers said investment and retail banking both hold risk but that boundaries between them are “fuzzy”. He said because retail customers have no effective alternatives to their banks for financial services, institutions must be able to fail without causing disruption to the provision of these services.
He said: “One response to this concern would be to somehow ringfence the retail banking activities of systemically important institutions and require them to be capitalised on a stand-alone basis. A variant of this idea would be to require the ringfenced retail banking activities to be relatively strongly capitalised while adopting lighter regulatory policies toward the other activities.”
Vickers said new rules from Basel III, which triple the amount of capital that banks must hold, may not be enough for big institutions and despite difficulties in how that extra capital is raised, he made it clear that holders of bank bonds should absorb losses if institutions run into difficulty.
He said: “Ultimately, financial risks have to be borne and in a market system, they should not be borne by the taxpayer providing a generous safety net.”
A British Bankers’ Association spokeswoman says: “The BBA welcomes the fact that Sir John rules out recommending narrow banking and that he is not advocating the break-up of banks. He is focusing on making the system safer.”