New proposals to make sure U.K. taxpayers no longer have to pay for banks’ failures have been praised by British Chancellor George Osborne.
The Independent Commission on Banking (ICB) recommended that banks’ commercial and retail operations should be ring-fenced to separate them from riskier investment divisions. It also said that banks should set aside more cash in case of unforeseen losses and future financial crises.
The ICB was set up by the government in September 2010 to promote financial stability and published its final report on Sept. 12. Its proposals should be implemented by 2019.
“The Commission has done what we asked it to do; it has come up with an answer to the question of how Britain can be the home of successful international banks that lend to families and businesses without exposing British taxpayers to the massive costs of those banks failing,” Osborne told the Parliament in London.
He went on to say that the U.K. should go beyond the new international Basel rules agreed upon in the wake of the credit crunch by the Basel Committee on Banking Supervision, a committee of 10 central banks.
“The balance sheet of our banking system is close to 500 percent of our GDP, compared with just over 100 percent in the U.S. and around 300 percent in Germany and France,” he said.
The report said that the objective of a ring-fence would be to “isolate those banking activities where continuous provision of service is vital to the economy and to a bank’s customers.”
“This would require banks’ U.K. retail activities to be carried out in separate subsidiaries. The U.K. retail subsidiaries would be legally, economically, and operationally separate from the rest of the banking groups to which they belonged.
“They would have distinct governance arrangements, and should have different cultures. The Commission believes that ring-fencing would achieve the principal stability benefits of full separation but at lower cost to the economy.”
A wide range of financial services could not be provided from within the retail ring-fence. It would be limited to payment services in the European Economic Area and to the intermediation between savers and borrowers with the EEA non-financial sector. The ring-fenced activities would have minimal exposure to the global financial markets.
In order to cushion banks in the event of financial crisis, the new rules mean that large U.K. retail banks would have to have equity capital of at least 10 percent of risk-weighted assets. The retail and other activities of large U.K. banking groups would both have a primary loss-absorbing capacity of at least 17–20 percent equity.
According to the commission, none of these measures should threaten the competitiveness of U.K. banks.
The British Bankers’ Association urged for caution in implementing the proposals. “U.K. banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by U.K., EU, and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained. The ICB’s recommendations cover the same important issues,” it said in a statement.
“Any further reform measures adopted by the U.K. authorities need to be carefully analyzed and compared with those agreed internationally. It is vital that the full impact any further reforms will have on the economy, the recovery, and banks’ ability to support their customers in the U.K. is understood.”
According to the report, the reforms should cost the major U.K. banks 4 billion–7 billion pounds (US$6billion–US$11 billion) a year (before tax) to put in place.
Some fear the cost of the reforms will be borne by U.K. customers. Kevin Mountford, head of banking at the financial services comparison website MoneySupermarket, was quoted on the website as saying, “The main concern of these recommendations is the additional costs on the banking sector, which could either be passed on to customers in some shape or form, or see a number of banking operations moving their head offices away from the U.K.”
Some MPs have suggested that waiting until 2019 to put in place the proposals is too long, but Osborne insisted the timeline was suitable.
The Federation of Small businesses also urged the speedy implementation of the reforms. John Walker, national chairman of the Federation of Small Businesses, said in a statement: “The recommendations laid out in the report have the potential to make the sector safer and more secure. The government must not water down the proposals and we urge the Chancellor to ensure that they are fully implemented before the end of this Parliament.
“Each of the main political parties has promised some kind of banking reform and it is what people expect to see. With 89 percent of small businesses believing that the way the sector works needs to change, it is now imperative that the government makes this happen.”
Trade unions were divided in their response, with the Trade Union Congress praising the proposals while Unite called them “pointless.”
TUC General Secretary Brendan Barber said in a statement: “These proposals will make banking safer, even if on a timescale that gives the banks too many opportunities to lobby for loopholes. The government must legislate speedily to ensure that the plans are not watered down.”
David Fleming, Unite national officer, said in a statement: “The proposals set out today kick the overdue reform of the banking sector into the long-grass. The suggestion to create firewalls in 2019 will bring immediate uncertainty to workers across the sector, while the greedy bankers find ways to maneuver around, and lobby against these reforms.
“Simply creating a firewall is at best a weak gesture and at worst a pointless act which will not in any material way impact the behavior or culture at the top of the banks where this crisis was born.
“The report today makes no mention of the more than 150,000 finance workers who have lost their jobs in bank branches, call centers, and processing centers across the country since the start of the banking crisis four years ago as a result of the greed of those at the top of the sector.”