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State-owned banks hit out at Govt banking reforms

London UK Thames Parliament 480

State-owned Lloyds Banking Group and Royal Bank of Scotland have hit out at the Government’s banking reforms, calling for them to be significantly watered down.

In written evidence to the Parliamentary Commission on Banking Standards, published today, both banks say the new rules will damage the economy.

Last month, the Government published a draft banking reform bill based on recommendations by Sir John Vickers’ Independent Commission on Banking, published in November 2011.

The ICB recommended creating a ring-fenced retail arm of banks to protect to it from the riskier elements of the investment arm, to be implemented by 2019.

In its evidence, RBS calls into question the entire rationale of reforms by arguing that any ring-fence will weaken the banking system and still leave the Government liable to bailouts.

Lloyds is arguing for transitional or grandfathering measures to run until 2025, significantly beyond the current deadline of 2019, in stark contrast to HSBC and Barclays who last week argued for reforms to be brought forward.

The RBS submission states: “We believe ring-fencing will tend to weaken banks’ credit ratings, could have negative economic impacts and, if not carefully executed, cause disruption to customers, while bringing at best modest incremental gains in resolvability.”

It says the reforms will “cement and make more explicit” the perceived Government support for the ring-fenced bank. RBS also argues that ring-fencing retail banks is not a “panacea” to creating a better culture, pointing out recent misselling scandals within retail banks.

Lloyds’ submission says the implementation date of 2019 is reasonable due to the complexity of the changes, but it states: “There may be circumstances – such as third party consents which will not be granted and overseas regulatory approvals which are subject to delay – which may delay implementation beyond 2019 for reasons outside of a bank’s control.

“We would welcome confirmation that transitional or grandfathering provisions will be in place to accommodate such circumstances.”

Both banks oppose the proposed ban on simple derivate products, such as interest swap rates, from being sold through ring-fenced banks.

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