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RBS warns ringfencing bank retail arms would raise risk

Royal Bank of Scotland chief executive Stephen Hester says proposals for UK banks to ring-fence their retail arms would raise risk in the banking industry.

Last week, Hester gave evidence to the Treasury select committee on the Independent Banking Commission’s interim banking proposals. The interim report, published in April, proposed a requirement for banks to ringfence their retail operations from the wider group to make it easier and cheaper to rescue failed banks. He said: “Creating a ringfence increases some of the systemic risk and decreases the ability of banks to withstand risk, at a significant cost.”

AWD Chase de Vere head of communications Patrick Connolly says: “I do not see how ring-fencing a retail arm could increase risk because you are separating it from the investment risk the bank takes. If anything, it would reduce the risk. However, it may lead to increased costs for the bank if there is some cross-subsidy between the two divisions.”

First Action Finance head of communications Jonathan Cornell says: “There are organisations with huge investment banks alongside retail banks and we need to find some way of making sure people are not standing outside branches, as was the case with Northern Rock.”
The ICB will publish its final report in September.

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  1. Ring fencing the retail operation of banks has the potential to reduce risk, in that the supervisor/regulator could require the ring fenced part of the bank to only use its equity, debt and deposit cash for lending and other forms of risk taking that were readily understandable by all involved. Through easy-to-understand banking operations it would be possible to see with some confidence what risks were being taken and prevent them from being excessive.

    This is the approach that the Building Society Commission took in the olden days. It didn’t guarantee that there would be no bad lending or liquidity problems, it just made it easier for them to be forecast and managed.

    The EU could throw a spanner in the works, of course.

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