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Banking Commission: Retail banking must be ring-fenced

Robert Peston | 07:29 UK time, Monday, 11 April 2011

The Independent Commission on Banking (ICB) set up by the Treasury has come up with reform proposals for the banking industry in the UK that will anger and worry both the banks and the banks' sternest critics.

The central recommendation of its interim report - which is arguably the most important response in the UK to date to the financial crisis of 2007-8 that triggered the worst recession since the 1930s - is that a protective firewall should be put around the British retail banking operations of big universal banks, such as HSBC, Barclays and Royal Bank of Scotland.


Canary Wharf, London

 

Customers' deposits, business lending and the transmission of money would be ring-fenced within the universal banks as new subsidiaries, endowed with increased capital resources to protect against losses.

Also, the ICB wants Lloyds to be ordered to sell "assets and liabilities" in addition to those that the European Commission is already obliging Lloyds to sell, to reduce its substantial market share in personal banking. If implemented, this would force Lloyds to sell more branches on top of the 600 it is already auctioning.

The big banks will claim that putting their retail banks into subsidiaries would impose significant extra costs on them - because it would force them to raise and retain more capital (which is expensive), and it would increase what they pay to borrow. Their fear is that these incremental costs would put them at a disadvantage compared with their international competitors.

However the ICB says that the banks have exaggerated the size of this new financial burden. It calculates that the extra costs would be a good deal less than the £12bn to £15bn a year estimated by the consultants Oliver Wyman in a report prepared for the banks.

Perhaps more importantly, the commission is convinced that the social benefits of the reform - in respect of reducing the likelihood of destabilising financial shocks that increase unemployment and cut growth - would significantly outweigh the costs.

The commission has also taken steps to reassure the government that it doesn't have a great deal to fear from getting tough with the banks and implementing the change: on its analysis, even if big banks such as HSBC or Barclays were to move their respective head offices abroad in protest at the reforms, the loss of tax revenue and the damage to the success of the City of London would be limited.

The interim report says: "The commission's view is that the reforms of the kind contemplated...would support the competitiveness of the economy and would be likely to have a broadly neutral effect on financial services".

Perhaps because of that, some will claim that the commission has been too timid - in that it has rejected more radical alternatives, such as breaking up the banks, imposing formal limits on their size, prohibiting them from using depositors' cash to make loans, or massively narrowing the range of their permitted activities.

The thinking behind the ring-fencing recommendation is that if the wholesale or investment banking arm of a universal bank were to go bad, the retail operation - which looks after our savings, lends to business and moves money around - would not be tainted.

And if in the event it was the universal bank's retail banking side that ran into difficulties, rather than the wholesale or investment arm, then in theory it would be cheaper and easier for taxpayers to rescue the retail bank as a ring-fenced, separable subsidiary: there would be no need for taxpayers to bail out the entire giant universal bank, as British taxpayers were forced to do in 2008 in the case of Royal Bank of Scotland.

That said, the commission has not been prescriptive about precisely which of the banks' assets and liabilities would be defined as "retail" and then ring-fenced: it wants to encourage a debate to determine the categories of deposits and business lending that should be moved, along with the money transmission networks, behind the new firewall.

There are a number of other proposals:

1) The retail banking subsidiaries of the universal banks and any other large retail banks in the UK, such as Lloyds and Santander, would have to hold equity capital, to absorb potential losses, equivalent to 10% of their respective loans and investments - which is 3 percentage points greater than the new international minimum of the so-called Basel lll accord.

2) Wholesale banks operating in the UK would not have to hold more capital than the international norm (which is likely to rise this year, as regulators on the Basel Committee and the Financial Stability Board review how much capital banks should hold to cover the risks of their trading activities).

3) A universal bank would be able to move capital from its retail arm to its wholesale arm (and back again), so long as the separate subsidiaries never let their capital ratios fall below the new minimums. This, in theory, would preserve some of the benefits for a universal bank of being a universal bank.

4) The commission regrets that Lloyds was able to acquire a huge 30% market share in current accounts through the rescue takeover bid of HBOS at the end of 2008 - but it does not recommend that Lloyds should now be forced to divest HBOS.

5) To promote greater competition, Lloyds should be forced to dispose of a greater "package of assets and liabilities" than it is currently being required to do by the European Commission. Unlike the rest of the proposals in the interim report, this recommendation will require an almost immediate decision by the chancellor of the Exchequer - because Lloyds has already started to sell the 600 branches, current accounts and mortgage accounts it is obliged to offload, and it would be very difficult for it to sell another bit of its operations at a later date (see below for more on this).

6) The implicit charges and costs to customers of current accounts should be set out in a much clearer and more comprehensible way, and there should be a deadline of perhaps seven days imposed on banks for transferring over customer information when someone moves his or her current account to a new bank.

7) The new Financial Conduct Authority being created by the government to protect consumers of financial services should have "a clear primary duty to promote effective competition" - which will please MPs on the Treasury Select Committee, who have already called for this.

8) In the longer term, a new automated system for shifting a current account from one bank to another should be created. And it should perhaps be possible for current account customers to keep their account numbers when they move banks, in the way that mobile phone customers can keep their phone numbers when they change suppliers.

So where do we go from here?

There will now be an intense and passionate debate, between banks, politicians, regulators and assorted campaigners, about whether the commission has been too tough or too soft. The commission is scheduled to produce final recommendations in September - and the government will only then have to decide whether to implement those recommendations.

On paper, the commission has been less bold than the Lib Dem Business Secretary, Vince Cable, would have wanted when he was in opposition. It will be interesting and important to see whether Mr Cable's views on bank reform have been mellowed by his participation in government.

As for HSBC or Barclays, it is not clear that they would gain much by carrying out their sotto voce threats to move their respective HQs abroad - since this would not protect them from the requirement to increase the equity capital they hold in their British retail banking operations to 10% of assets.

And unless they were to move their new head offices to another part of the European Union (and I've discussed in earlier posts why emigration to Paris, Frankfurt or Luxembourg is unlikely), they probably couldn't dodge the requirement to put their UK retail operations into new subsidiaries (because British regulators have the power to insist on subsidiarisation for all banks except those from another part of the EU).

Now because Santander has its head office in Spain, it may be that it will be seen to have an unfair advantage over RBS, Barclays or HSBC. But I understand Santander already operates through a subsidiary in the UK as Santander UK (I will let you know if I am wrong about this).

Anyway, if George Osborne is persuaded by the commission's argument, he can probably implement its proposals with little risk that the banks can exact revenge on him by stomping out of the UK in a huff (of course some of you would probably quite like them to do that in any case).

On the other hand, Mr Osborne doesn't have to make up his mind for a while - except on one issue. If he thinks the commission is correct that, for the good of competition, Lloyds has to slim down more, then more-or-less straight away he has to order Lloyds to postpone the disposal of 600 branches.

The reason is that Lloyds - under its new chief executive Antonio Horta-Orsorio - has recently accelerated that sale, presumably because it spotted there was a risk that it would be ordered to do more. And Lloyds would find it difficult to sell a second lump of assets for a decent price so soon after the first.

If Lloyds and its shareholders - which include taxpayers with 43% - are to get the best possible price for selling a chunk of its business, far better for the sale to be in one big lump than two small ones.

In that context, you may be amused that the commission gave Lloyds advance notice a month ago of this one recommendation (but none of the others).

Interestingly, Lloyds did not feel it needed to tell its shareholders what the commission wanted - and nor has it manifested any conspicuous inclination to slow down the auction of the smaller lump of its business it was already obliged to sell.

Update 1100:

So will the banking commission's proposals split the coalition, pitting the Lib Dems - supposedly more radical on bank reform - against the Tories?

Probably not - because the commission seems to have framed its recommendations with more than half an eye on what each party said it wanted before the election.

Both Lib Dems and Tories can claim the commission is offering something similar to what they wanted.

Lib Dems can and probably will say that ring-fencing retail banking is close to splitting retail from investment banking.

As for Tories, they proposed a form of America's so-called Volcker rule. And the interim report says: "The Volcker rule shares a common motivation with the retail ring-fence in that it aims to curtail government guarantees."

In other words, the commissioner is presenting his retail ring-fence as a kind of Volcker rule for Britain.

PS - Lloyds tells me that the commission made what it saw as a flaky proposal to it a few weeks ago: to hive off some assets into a new nationalised bank.

Lloyds claims it was not given a workable recommendation to dispose of more assets and liabilities - which is why it decided not to tell its shareholders about the conversation with the commission.

Comments

Page 1 of 4

  • Comment number 1.

    Robert

    Until the Government addresses the way banks record assets without real value on a bank's balance sheet, we are just going to move from one banking crisis to another!
    http://www.accountingweb.co.uk/blogs/jefflcbba/mad-lemming/1500000000000

  • Comment number 2.

    HOW BANKERS CAUSED THE CREDIT CRUNCH AND HOW THEY CAN BE BROUGHT TO JUSTICE
    There has been much media coverage showing public anger, demonstrations and condemnation against the hypocrisy and outrageous behaviour of bankers who caused the banking crisis. But nothing has been done to have these bankers, who are autocratic financial terrorists, brought to justice.

    The only way to have fair distribution of our nation’s wealth is to have: the bankers who caused the banking crisis brought to justice; proper banking regulation; separation of investment banking from all other banking institutions including mortgage banking; independence of the judiciary restored; control and ownership of the media to be kept independent of, private vested interests and multi-national conglomerates; a crack down on the behaviour of bankers, politicians; and on bankers excessive salaries and bonuses; cash for honours; cash for the manipulation, evasion and avoidance of corporation tax. Any breach of which to be backed up by deterrents of heavy fines and jail sentences.

    TO HAVE ALL THOSE INVOLVED BROUGHT TO JUSTICE REQUIRES AN UNDERSTANDING OF THE HISTORY OF THE BANKING SYSTEM, LEGISLATION AND HOW THEY CIRCUMVENTED REGULATION AND THE LAW BY CHANGING THE BANKING SYSTEM INTER ALIA.

    Homeowners not to blame for accepting cheap Loan to Value Mortgages (LTV) up to 125%.

    The credit crunch exposed the driving force behind Gordon Brown’s booming economy, i.e. mortgages up to 125% created a booming property market.

    Britain has always been a homeowner-based economy, not like the economies of France and Germany, where the majority of people live in rented accommodation. Homeownership made Britain one of the wealthiest and stable economies in the world.
    Homeownership has always been the foundation of the British economy and credit ratings upon which stability and confidence depends.

    Property, since the days of Caesar, has always increased in value, any decrease in property prices is only temporary.

    Scarcity of building land, difficulty in getting planning permission and the time it takes to build substantial property using bricks and mortar and with every increasing energy costs, material and labour costs, it all adds up to a very valuable asset that increases in value. Programs on how to improve one’s property, how to make a profit by increase its value for sale started to appear on television. With the availability of so much cheap Loan To Value (LTV) mortgages, why look the gift ho

  • Comment number 3.

    Hi. What good (and how useful) is business/economics journalism if it cant warn, explain and help us out of financial collapses such as we have had recently. Where do such reporters get their self assuredness from? Isnt it all just talk with no practicle use?

  • Comment number 4.

    Proof, if it were needed that the Banks run the Government, not the other way around.

    The best word I can find to describe the report, from Robert's unpicking, is "flaccid".

  • Comment number 5.

    As long as the separation of the retail and investment branches remains in-house the banks will still retain control of the situation and will always find a way to circumvent restrictions which only exist on paper.

    I don't see how the situation can be monitored or policed given that the source of all banking information comes from the banks themselves.

    Maybe the simple answer is to nationalise the banks under the control of the Bank Of England.

  • Comment number 6.

    Morning Robert,
    Good sensible recommendations, which will need to be implemented diligently. The interim report falls short of splitting up banks. This is the right thing to do as Lehmans and Northern Rock were stand-alone banks, one retail and one investment, and these failed. The recent crisis was caused by a failure to understand systemic risk, not integrated banking. Even Gordon Brown has admitted mistakes today - a day I thought would never come.

  • Comment number 7.

    Nothing here will prevent a future crisis, even if it reduces the likelihood that taxpayers will have to pay for it. If we really want to force banks to stand on their own feet and become socially useful again, we need to ensure that banks that screw up are allowed to fail.

    One reform that allows that is 'full-reserve' banking, which removes the ability of banks to grow the money supply whenever they lend. More details here for anyone who is interested:

    http://www.positivemoney.org.u...

    The crisis wasn't caused by a lack of competition - it was caused by banks creating up to £200billion a year of new money through they accounting process they use to make new loans. Banker's refer to it as 'credit expansion' - Martin Wolf refers to it as 'the creation of money out of nothing by private bank's foolish lending'. I haven't seen anything from the Commission that recognises that fact.

    Disappointing...

  • Comment number 8.

    re #1
    Suggest you have a look at a few sets of accounts for banks:
    http://group.barclays.com/Investor-Relations/Financial-results-and-publications/Results-announcements

    The old joke applies: Borrow £1000 from bank and default - it's your problem, borrow £1,000,000 from a bank and default - it's the bank's problem.

    So, they make provisions against the likely default. It applies to unsecured lending as well as the secured example that you mention. Credit card debts as well as high value corporate loans.

    The depreciation of the houses may not be a direct concern for the bank - it will be 'Can the developer finance the loan repayments?'. 'Is the developer a 'one-trick pony', are they only building houses that are not selling or do they do other stuff as well ?' 'Do they have substantial reserves?'

    If the answer is no, then the bank is into a bad debt management situation.

  • Comment number 9.

    A very simple system would be to have all banking regulated as cash deposit and cash investment; whereby the bank must always hold 100% of the cash deposit in its vaults, and any money moved into cash investment can only be on a time guarranteed bond - i.e. 100 days or more. This way the bank will know exactly when it needs the cash to fund the repayment, plus can keep a totally accurate balance sheet. The government can then work out what ratios it wants with 100+, 200+ 500+ day investements etc. This way it makes a short run on a bank impossible, and can encourage long term lending with higher interest - and lower percentage equity holding.

  • Comment number 10.

    Summary makes little mention of what is needed to control what the banks do and how they treat customers. If anything goes with the investment banks a massive crisis of confidence could develop which could spread like contagion among the general users who would like NR turn up demanding their money. Banks with or without firewalls need to be supervised and a substantial element of public ownership is a necessary foundation for a stable future.

  • Comment number 11.

    So the financial boardrooms, audit committees and auditors who sanctioned the use of financial instruments that no-one could understand and collectively produced mis-stated accounts are now to be relied upon to self police and produce even more complex accounts.

    Why should we believe that these greedy and incompetent people are capable of proper accounting when all the evidence points the other way?

  • Comment number 12.

    Doing "stuff" to the banks is hardly the long term solution. What caused the problem was the heads-in-the-sand approach to regulation adopted by The Treasury, The Bank of England, the FSA, and the Chancellors who presided over the long boom. These people need a reality check and a few lessons in risk and risk management. If the regulatory framework remains slack, banks will do what banks will do in a competitive environment - look for innovative ways to make money, which involve risk-taking. It is these areas - FSA, Treasury and Bank of England (government culture) - which need overhauling to ensure greater financial stability and to manage risk so that they don't "lose sight" of it.

  • Comment number 13.

    And another thing what has happened to the talk of statutory backed governance standards. If overpaid bankers foul up through incompetence, negligence or lack of due diligence they should not be too big to avoid jail.

  • Comment number 14.

    Since the commission is not going to recommend clear cut separation between retail and casino banking, would the government that set this commission guarantee that there will be NO MORE BAILOUTS OF FAILING BANKS?

  • Comment number 15.

    "The former prime minister told a US conference he had not realised the "entanglements" of global institutions."

    And therein lies the problem. These global institutions have decided they are too big to govern and can do what they like.

    They are the Al Qaeda of economics and world governments need to combine and sort them out.



  • Comment number 16.

    Yet again, the banks are in control of events. None of our politicians have the guts to do what is really necessary, which is to separate high street banking from the market trading operations of banks (aka gambling operations). It is an insult to call the latter investment banking, since many of their funds are simply short term trades lasting minutes, hours or at most a few days. This is very different from the traditional practice of placing money in a company for the longer term of at least a few months to years.
    Of course, the world has changed and continues to change, but if this is the case, then the institutional structure of banks needs to change as well to recognise and reflect the new reality.
    As said by others on this site, until politicians and regulators have the sense and courage to seriously 'sort out the banks' and ignore their greed based threats of moving their business overseas, then we shall most definitely have another financial crisis: probably sooner than later. Let's remember some of the UK and US banks would go to the wall tomorrow if their assets were valued at true market value, instead of the fraudulant levels they are allowed to use, along with all their 'off balance sheet' games.

  • Comment number 17.

    Robert,

    To me there still seems to be several question worth asking that you haven't commented on. They are connected to my long-term view that Universal Banks were never the real issue; the big problems poor lending decisions and reckless funding models in basic retail banking during an economic boom.

    First therefore; will the 10% capital requirement apply to all UK retail banks and building societies?
    (I assume so, but it hasn't been made explicit)

    Second, would a 10% capital requirement have actually stopped all of Northern Rock, Bradford & Bingley, RBS and HBOS from going bust?

    To my mind, if the second answer is not an unequivocal YES, the proposals are not comprehensive and rigorous enough.

    The UK retail banking sector's problems back in 2007/8 (other than being managed by morons) were ultimately a severe lack of BOTH solvency and liquidity. As such, I remain to be convinced whether 10% capital alone will be sufficient to prevent say, Santander UK, turning into repeat of Northern Rock in perhaps 2030 when the next boom turns to bust.

    I think other measures in addition to just capital requirements are needed (banking levy on wholesale funding? new creditor hierarchy? mortgage and commercial property lending restrictions?) and most importantly, are needed in perpetuity and not just for the next few years. Unfortunately, it is just human nature for more minor regulations to relaxed over the coming decades as people use the argument that the big fix of 'holding 10% capital' means retail banking won't fail again.

    I might be overly cynical but I am just not convinced that these proposals do enough to stop another unsustainable lending bubble in the UK from happening in another twenty-thirty in years time.

  • Comment number 18.

    I think the government should stop interfering with business by over-regulating it.

  • Comment number 19.

    2. At 07:49am 11th Apr 2011, FORENSIC DEBATE wrote:

    Britain has always been a homeowner-based economy, not like the economies of France and Germany, where the majority of people live in rented accommodation. Homeownership made Britain one of the wealthiest and stable economies in the world.
    Homeownership has always been the foundation of the British economy and credit ratings upon which stability and confidence depends.
    ------------------------------------------------------------------------------------------------------------------------------------------

    Where do you get your ideas from? This is almost the direct opposite of the truth. Britain was at its most prosperous, relative to the rest of the world, in the years before the first world war. Home ownership was at only 32% in 1953. Throughout the subsequent years of de-industrialisation, owner occupation rose to 43% in 1961, peaking at 70% in 2000. By contrast, during the height of Empire, Britain was clearly anything but a homeowner economy. Basically all of the working class and most of the lower middle class lived in rented accommodation.

    If you really believe that this country has been an economic powerhouse since 1960, compared to France and Germany, then you are, I'm afraid, living in a parallel universe. It is well worth considering whether there is in fact a direct relationship between our relative economic decline and increasing home ownership. Maybe this striking obsession with home ownership in the UK has diverted too much money and effort away from productive industrial capacity.


  • Comment number 20.

    A fine balancing act. It does nothing to undermine confidence in the bank's current stability (an enforced splitting of the banks would demolish share prices and investor confidence in banks) while it tries to make essential banking services protected from excessive investor risk. Unfortunately as a balancing act it has managed to place itself outside the territory staked out by both sides of the regulaion war and therefore annoy both of them for going "too far" and "not far enough" respectively.

    I do wonder if the doomsayers are correct and all these carefully spinning plates are all going to fall over at the same time at some point in the future. I do find it ironic however that it is the socialsts calling for tough action by the government (and blaming the tory ideology for insufficient action) when Gordon Brown admitted today that his regulatory efforts were insufficient. Brown used lax regulation as a way of ensuring that his economic forecasts proved correct as he encouraged the bubble of debt to inflate.

    I'm just glad that it burst when it did and not 3 years later when the bubble he created grew larger and he was allowed to slink off into the sunset without blame as he was no longer in charge.

  • Comment number 21.

    > The Independent Banking Commission set up by the Treasury has come
    > up with reform proposals for the banking industry in the UK that will anger
    > and worry both the banks and the banks' sternest critics.

    The bankers have been beaten into shape for now, but we must continue to punish them remorselessly for years yet, while the government cuts and European banker bailouts continue to irritate the electorate.

    The banks will never be able roll bank from these strictures, while the "sternest critics" can work on increasing their force for years to come.

    Break out the chardonnay!

  • Comment number 22.

    Whilst the 10% that the banks will have to hold will be painful to achieve in terms of money paid now to shareholders, I was wondering whether in the long term this will make the banks more appealing to invest in as they will be seen as more stable. The result would be a rise in share price. It could be a battle between short and long-termism. I can see a Pension Fund much more prepared to invest in a 10% bank than a 7% bank

  • Comment number 23.

    @ 18. At 08:57am 11th Apr 2011, mr ff wrote:

    > I think the government should stop interfering with business by over-regulating it.

    Sure, but these people are just bankers, not proper businesses.

  • Comment number 24.

    Perhaps because of that, some will claim that the Commission has been too timid - in that it has rejected more radical alternatives, such as breaking up the banks, imposing formal limits on their size, prohibiting them from using depositors' cash to make loans, or massively narrowing the range of their permitted activities.

    .................
    Too timid and predictably biased ... this is an interim fudge by the City establishment for the benefit of the City establishment. But these SOFOMT cheer leading Comission members are not tackling the substance of the problem with 'banks' which includes, e.g:

    1) the basic legal and other definition of what must and must not be regarded as a 'bank'

    2) The slippery internationalised structures of these bank for the purpose of avoiding and paying as little tax, as possible, in the UK on their global Sofomting operations together with the leeching of capital and getting the British taxpayer to underwrite their global Sofomting operations

    3) The related weaknesses in the relevant accounting operations, practices that allow the banks to use the UK as a cheap exploitative and soft base ... for their global exploitations of the vulnerable and underpaid.

    The fudge means that the establishment intend there to be business as usual, as soon as possible with no mention of e.g. a timeline and mechanisms for reducing the UK banking sector as a proportion of the British economy.

    To some extent this is not the fault of the Commission as some of these issues are beyond their remit ... but it looks as though the required clear physical splits and size restraints that are required i.e. between retail and sofomting, in a new more UK friendly structure ... are not going to happen.

    The capital ratios ... are a complete joke with zero transparency and nonsense bank accounting practices that still hide the myriad unquantified risks and massive tax fiddling that is actively encouraged by UK govt on their part.

    This leaves some of the major ongoing crisis issues within the banking sector, ... deliberately unaddressed ... I have to say, by the work of the Commission.

    Where the work of the Commission is also failing is on the inter-related issues e.g. between weak accounting pratices and risk ... and as all relates to govt macro economic management of the UK economy ... particularly in relation to the use of public and private capital in the UK and the opportunity cost of the devious nature and operation of Britian's banks regarding capital movements to avoid paying their fair share of British tax ... but at the same time receive the benefit of the most disproportionate bail outs from the British tax payer.

    Ring fencing is OK for protecting e.g saving deposits but is not suitable for major structural reforms.

    The proposals of the Commission stink ... are a deliberate establishment fudge and do a great dis-service millions of ordinary British families and taxpayers. The reality is that we have to downsize the exploitation and risk posed by these treacherous back stabbing banking institutions that will not invest full capital in Britain, to the benefit of the British taxpayers and workers.

    The only way to reduce the risk still posed to the British economy by these Sofomting institutions is to drastically or gradually start reducing their size ... and put in tough laws for their investing much more capital in Britain ... and with fines and penalties imposed here for failing to meet capital investment and UK taxation targets. This means that although the reduction in the banking sector will not be without some pain in itself, the higher taxes and higher capital input to the British economy would balance out during the transition period until an equilibrium is reached for the British economy in terms of optimum banking activity as a proportion of the British economy... i.e the major rebalancing that is required.

    If the Commission cannot indicate the 'optimum overall profile' for 'banking' within the British economy (as a substantive economic stretegy determination) on relevant measures, size, transactions, capital investment etc. ... then their analysis and conclusions will be fatally flawed and suspect as to its relevance and usefulness.

    FUDGE! FUDGE! ESTABLISHMENT FUDGE!

  • Comment number 25.

    Excellent reporting, Robert.
    Mild reservations about your TSB analysis but there look to be sins there. Even if only of ommission!

    Thanks

  • Comment number 26.

    Another inside job, why are we not suprised?

    The next banking crisis is just around the corner. However indirectly we may sponsor the investment banks it benefits only the bank shareholders and no one else.

  • Comment number 27.

    The concerns being correctly addressed by the Independent Banking Commission are only part of a wider story: Large investment banks must look to invest in the controls and the tools supporting those controls to be able to allay the fears of the regulator and hence the public. Only once this has happened will confidence be restored in the global banking industry.

  • Comment number 28.

    @23

    they provide a service to customers do they not?

    Like them or not that cannot be argued.

  • Comment number 29.

    It is very disappointing that the report dismisses Full Reserve Banking – it says “While some of these proposals have sensible aims and could be welcome developments if banks chose to adopt them, the benefits of mandating these structures across the sector do not appear to outweigh the costs and risks. Accordingly, the Commission does not propose to pursue them further.”

    The report doesn’t even say that the changes would allow the FSCS to be withdrawn (taxpayers insuring the banks against failure).

    Still, the remit was to make banking a bit safer, not to fix the economy. It wasn’t set up to tackle issues like boom and bust, or escalating debt, or poverty, or Sure Start centres and Libraries having to close.

    Fixing the economy needs reforms to the money supply as proposed by Positive Money, which are basically very simple and intuitive -
    - all new money (typically £150bn per year) should be created by the Bank of England, not the commercial banks
    - all new money should be created debt-free, ie. not requiring repayment or incurring interest

    http://www.positivemoney.org.uk

  • Comment number 30.

    And another thing (II) any mention of the unprofessional behaviour of auditors who either failed to see the dangers or more likely turn a lucrative blind eye. Surely we need these twisters to be governed by statute with the prospects of jail for extreme cases of nod and a wink neglect.

  • Comment number 31.

    "By contrast, during the height of Empire, Britain was clearly anything but a homeowner economy. Basically all of the working class and most of the lower middle class lived in rented accommodation. "

    -- and with child labour, poor education, and the lavish lifestyle of the English gentry what a wonderful world it must have been in the UK for some.

    Speaking of 'gentry' can we have more competition in London and force the Duke of Westminster to sell some of his leases?

    Thought not.

  • Comment number 32.

    Why can we not just have a referendum on these things like Iceland...

    I'm all for protecting retail deposits, but in terms of investment banking activities...

    Vote yes to bail out the banks
    Vote no to let the banks fall on their swords

    The more the big banks squeal the more the medicine is going to work. Some commentator the other day said we needed a solution that would never allow this to happen again.... Would that be like the Glass-Steagal Act, implemented after the '30's which stood firm until repealed in '99?

    No matter how strong the arrangements put in place now, give it 15 or 20 years and it'll be eroded again as the lure of inflated profits grows too attractive!!

  • Comment number 33.

    "And if in the event it was the universal bank's retail banking side that ran into difficulties, rather than the wholesale or investment arm, then in theory it would be cheaper and easier for taxpayers to rescue the retail bank as a ring-fenced, separable subsidiary: there would be no need for taxpayers to bail out the entire giant universal bank, as British taxpayers were forced to do in 2008 in the case of Royal Bank of Scotland".

    Herein lies the crucial flaw in this report: it chooses to shy away from addressing - let alone proposing any remedy for - the underlying cause of the problem. It averts its eyes from the elephant in the room.

    Which is:- that the mega-banks are too big to be allowed to fail. Not only will nothing in this proposal change that but the Commission explicitly(?) acknowledges the continuing possibility of future failures (of the retail arms of these banks) and suggests that we draw comfort from the fact that their having been ring-fenced will make it easier and cheaper in future for us to rescue them!

    Not only that but it remains deafeningly silent in regard to the question:- What if it were to be the investment-banking side that (as in the case of Lehman) "ran into difficulties" in the future? Could that too expect to be bailed-out by the taxpayer or would it be allowed to fail? No prizes for guessing which it would be.

    So socialised losses and privatised profits continue into the indefinite future. It's "business (and bonuses) as usual" chaps.

    I think this is a breathtaking repudiation by the Commission of its responsibility to the public and that that it will be seen by posterity as having abjectly failed to face up to its task. It has clearly tempered its recommendations in advance to what it knows will be the least unacceptable extent of change, instead of being motivated - as it should have been - by the public good. An abject surrender to political expediency. A non-event.

    Shame on them all!

  • Comment number 34.

    Is there anything in there that says that when a bank goes bust and has to go cap in hand to the lender of last resort, the bank is first put into administration?

    The deposit protection scheme is there to protect depositors, not bank shareholders and other investors.

    If that isn't there, then that is a strong argument that the deposit protection scheme should be abandoned and replaced with 100% matched maturity reserves.

  • Comment number 35.

    @19. abune:

    Well said!

  • Comment number 36.

    Makes sense to me that the new regulations should cost the banks more as the cost of underwriting their risk is being shifted from the tax payer to themselves - eminently fair!

  • Comment number 37.

    28. At 09:54am 11th Apr 2011, mr ff wrote:

    > (bankers) provide a service to customers do they not?
    > Like them or not that cannot be argued.

    Yes, they provide an uncompetive and expensive service that endangers the welfare of Britain. Of all the many ways of organising banking, the worst is the one we have today, and much of the sector's activities are "socially useless". Like them or not that cannot be argued.

  • Comment number 38.

    20. At 09:14am 11th Apr 2011, Jay_W_W wrote:

    "I'm just glad that it burst when it did and not 3 years later when the bubble he created grew larger and he was allowed to slink off into the sunset without blame as he was no longer in charge."

    Glad you take comfort by pinning the Global 2008 Recession/Depression on Gordon Brown....

    Pity he wasn't around any other time this has happened...

    All he has admitted to- is what we already knew -he didn't understand what was really going on!

    You could almost direct that criticism at almost any politician, economist and regulator in any country you wish.

    Only a handful of bankers/speculators knew exactly what was going on and profitted from it...


  • Comment number 39.

    The report says "Some have argued that full reserve banking should be mandated as an option for all deposits [...but] in light of deposit insurance, mandating that all depositors have such an option appears unnecessary"

    So DEPOSIT INSURANCE is still needed! - you and I will still have to carry the risk, by insuring the banks against collapse. What other business has the luxury of this sort of safety net, paid for by taxpayers?!

  • Comment number 40.

    Where is the regaining of control over the creation of 'money' ? Since when was it acceptable that an entity other than the BoE could create money through the creation of debt ? RBS 'created' over a trillion pounds of debt from nothing - and without any regulator spotting the trend and demanding action to bolster reserves. Positive Money and/or the Swedish model of registered money seem to be most appropriate way to go.

    As for the ringfencing of 'systemic' banking services, why doesnt the Govt create a national banking 'spine' of 100% guaranteed retail deposits and core services, and watch the money flood in. Should force the other banks to up their game.

  • Comment number 41.

    @34. Neil Wilson wrote:

    "If that isn't there, then that is a strong argument that the deposit protection scheme should be abandoned and replaced with 100% matched maturity reserves".

    And, guess what - it isn't there.

    So your corollary follows. But they've already expressly dismissed that possibility out of hand, as too radical.

    Back to square one. The deposit protection scheme will continue to protect bank shareholders and other investors. A licence to make risky bets, knowing you won't have to pay if you lose, the taxpayer will (whereas you will collect the loot if you win).

    So no change there, then.

  • Comment number 42.

    Once more we shall be subjected to the sight of a senior banker saying this is all too much and will drive banks abroad.
    These are the same banks who put their most valuable assets into offshore companies created to avoid UK tax.
    These are the same banks who always (and correctly) believed they would be bailed out by Governments because they are "too big to fail".
    These are the same banks who are largely responsible for the economic downturn leading to cuts in jobs, pensions, wages, and essential services.
    These are the same banks who continue to pay their top staff esoteric "rewards".
    These are the same banks who oppose any suggestion of being brought to public account.
    So to any banker who claims these measures are "all too much and will drive banks abroad" I say, "fine, do you want a lift?"

  • Comment number 43.

    Well Robert, at least Lloyds shareholders, having been well and truly shafted the first time round and the culprits now retiring with what little is left, can't lose much more whatever happens. The moral here, and the safe option is never ever trust anybody who works in or around financial services.

  • Comment number 44.

    #33 torpare

    Good post!

    Tell us Robert,

    How big would an 'investment-only' bank need to be before it too is 'Too Big to Fail'?

  • Comment number 45.

    Another load of vacuous piffle.

    > > 8) In the longer term, a new automated system for shifting a current account from one bank to another should be created. And it should perhaps be possible for current account customers to keep their account numbers when they move banks, in the way that mobile phone customers can keep their phone numbers when they change suppliers. = =

    That hows how naive this Commission bunch is. Each bank allocates each account an unique number based on location (or organisational unit) an 8 digit number so it works in BACS, and takes a few other factors into account. There's a strong likelihood that when converted to fit another bank the account number would be duplicated.

    Mobile phones are different. Number allocation ensures that every phone gets a unique number. To replicate this, a central agency would have to allocate account numbers and I can just see the banks loving that! I mean, look at the conversion headache!

  • Comment number 46.

    I see that Gordon Brown has finally come clean about his bad banking regulations and the fact he didn't have a bloody clue what was happening in the banking system. Odd that when everybody else did know what was going on and he was warned many times.

  • Comment number 47.

    RP wrote: ....because the commission seems to have framed its recommendations with more than half an eye on what each party said it wanted before the election.
    ----------------------------------------------------------

    So no real independence, just wishing to give the political masters what they want?

    A total waste of time, no credibility!

  • Comment number 48.

    Seems more like a way of *avoiding* truly radical reform (i.e., reform) to me, predictably.

    This will facilitate:

    The withdrawal of State guarantee from investments and savings, except for those in "retail" banks.

    In turn, this may make it electorally possible to allow banks to fail. This alone, many Tories claim, will offer the necessary discipline. (However, that was the understood position anyway before GB stepped in).

    It will not, in itself as far as I can see, change any intrinsic behaviours.

  • Comment number 49.

    I haven't read the report but banking shares have not tumbled so I presume that bankers have already found it laughable... Funding to the big Ponzi will now have to be diverted through a complex arrangement that can easily be administered with basic software, I presume??... If the Bank of England can be allowed to Fudge the numbers then I presume that investment banks are fairly confident that they will be allowed to reinterpret the report and its recommendations. Their operational funding will now be interpreted as increased business lending at preferential rates (Read 0%)

  • Comment number 50.

    My money and all other taxpayers money is still going to be used to guarantee other people's risky investments though. All these measures will do is make it slightly less painful when the banks face another crisis, which they inevitably will at some point in the future.

  • Comment number 51.

    19. At 09:03am 11th Apr 2011, abune wrote:

    "...Maybe this striking obsession with home ownership in the UK has diverted too much money and effort away from productive industrial capacity..."

    ++++++++++++++++++++++++++++++++++++++++++

    Probably, but it's easy to see from where the preoccupation stems.

    UK people have nothing like the protected rights of occupation of those in constitutional republics like France and Germany. The only way they can get anything like these is by owning the fee simple or a term of years in relation to a piece of realty.




  • Comment number 52.

    What is being proposed here is nothing more than a 'fudge'. The worst of all worlds.

    The prime problem that created the financial crisis in the first place 'Fractional Reserve Banking' was in no way mentioned by the commission in its interim report.

    The suggested firewall between retail and investment banking simply will never work, given the international nature of banks. The only firewall that is certain to work, and that would fully protect retail bank customers, is the firewall of the complete separation between retail and investment banking, with the retail side being operated on the basis of Full Reserve Banking. The investment 'casino banking' should be an option that the bank's customers enter into in full knowledge and know that their money is at risk, but could win higher earnings.

    If these banking activities are not completely separated the taxpayer will always bear the risk of a banking collapse, and all we will be waiting for is the next crash.

    The reason that we keep getting crashes is because the current system is designed to run on the basis of boom and bust. Until this changes this pattern will continue. So, it's time to change the system, not fudge the issue and keep propping up the old one.



  • Comment number 53.

    This is a firewall without any walls.

    Page 191, Figure A7.1, of the ICB Interim report states that “Securitisation” should only reside in the “Permitted in non-bank institutions” box.

    Can you get someone on the commission to explain exactly how this will work in practice given that “Securitisation” actually transcends Retail & Investment banking. Please, Robert can you swot up on the O2D model of banking:

    http://forensicstatistician.files.wordpress.com/2010/11/icb-submission-nov-2010.pdf

    The retail arm “Originates” the loan in the first place. So they must hand it over (i.e. sell it) to the Investment arm for them to package up and re-sell!

  • Comment number 54.

    No amount of defence mechanisms and barriers would have prevented the impact from Lehman Brothers. These initatives from an indepedent commission are well received and probably the right thing to do but I very much doubt the coalition will have the bottle to see it through as Vince Cable wanted.

    We have major problems still today as it was not understood how risk was spread across the system - globally - not just within the UK and there was no buy in a global agreement to change it.

    The one things Banks can do more immediately is about global commodity prices.
    They have the power to raise the value of sterling and massive influence over the exchange rate. With the drop in Sterling we now see, oil price in sterling terms at a record high. We need urgent impact measures to lowering imported inflation before the cost of living is blown sky high and we stagnate even further..

  • Comment number 55.

    If you look at the way that the share prices of the banks have moved this morning Robert they do not agree with your conclusion as they have all gone higher! One analysis I read fitted much better and made me smile.

    "Another way of analysing this sort of thing was provided by Sir Humphrey Appleby who was the apochryphal head of the UK Civil Service in Yes Prime Minister. He observed that you should never believe anything until it is officially denied. Accordingly please read this news headline from Reuters below.

    UK’s ICB head Vickers says he “absolutely rejects” any criticism that interim report has been soft on UK banks."
    [Unsuitable/Broken URL removed by Moderator]

    It fits the evidence so far.

  • Comment number 56.

    Addendum to #53

    Therefore, the Retail arm is de facto engaging in Securitisation! To declare it sits outside the retail sphere is a blatant mis-representation of how modern banking works! It is not the institutional form of banking that matters, but the monetary functions of banks (i.e. the flow and movement of money that Gordon Brown admits that he didn’t actually understand!).

    It is the loan creation aspect of Retail that the Investment banks wants it sticky mits on, not the deposits!

    Is the wool getting well and truly pulled over our eyes, here?

  • Comment number 57.

    I see the bank bashers are out in force.

    #33 seems to me the most sensible comment.

    As long as banks are run as commercial businesses there is a possibility some will fail.

    Having the investment arm and the retail arm in separate subsidiaries might well assist in rescuing the retail arm but that simply does not address the issue of systemic risk - the too big too fail argument. As Gordon Brown has now admitted he simply did not realise how entangled the banking system had become. So if we have a system where someone like Barclays is too big to fail, splitting the bank into 2 and keeping the retail arm "safe" achieves nothing when it is the investment arm that fails - if the investment arm is too big too fail.

    Then there is the difference between investment and retail. If a bank customer purchases an oil price hedge from a bank is that retail or investment banking? Does it make a difference if the bank then goes into the market and buys a hedge against oil prices to offset the risk it has now written with the customer? Does it make a difference if the bank has one customer with an oil price hedge or thousands?

    As soon as you get into detail it is clear that it is impossible to draw a neat line between retail and investment banking.

    The report is, like a number of reports for govt over the last few months, moderately useless. There are some good things in it (the portable account number seems to me to be very good) but they are out weighed by the rather larger number of headline grabbing proposals that are either poorly researched or where obvious flaws are simply ignored and not discussed.

    A good, independent look at the banking industry was needed. This report is not it

  • Comment number 58.

    Were the banks perpetrators of the banking crisis, or did governments and regulators adopt a laissez-faire attitude which did not prevent the banks from doing so, knowlinly or not. Do these proposals achieve that, in spite of (any) government or Bank myopic behaviour.
    At the consumer end, it can only mean that borrowing will become more expensive and more scarce, so the banks may well promote high margin consumption driven lending and downplay long term lending based upon assets. How is or can that risk be eliminated in these proposals.

  • Comment number 59.

    This is just the sort of thing I was suggesting right at the beginning of this process; splitting up the big banks being too radical and leading God knows where, and something similar to the status quo not tenable. Ring fencing retail banking from investment banking is something both sides of the argument can agree with. As for the Lloyds conglomerate, conceived in necessary haste, I always thought some form of subsidary spin-off inevitable. I favour the split off of the Halifax, and then its remutalisation as the building society it once was.

  • Comment number 60.

    If I recall correctly Lehman had greater than a 10% capital buffer. When a run starts 10% was burned very quickly. In this case how do the retail operations continue without govt intervention. I am sure they will be tangled with the wholesale bank so tight that it will be impossible to allow the wholesale to fail and the retail to prosper. You'd get a run in a retail bank anyway if their Wholesale bank failed (think for e.g. BarCAP failed).

    A second point is if we read "Too Big To Fail" it's widely recognised that all NY wholesale banks were at risk of failure. If JP Morgan had gone so would GS. The system needs wholesale banks therefore the government would still have support their continuing operations if there was a repeat crisis. Who are the provisers of retail services and wholesale services of "last resort"? If it is the govt then no change. If it is the last man standing then they like Lloyds will likely inherit a monopoly position.

    These changes will help in a mini crisis but a major one I'm not sure.

  • Comment number 61.

    Why a 10% capital requirement? Why not 15% or 20%?

    I doubt any of this would make any real difference other than increasing capital costs and the cost of doing banking in the UK. Banks should start paying customers 0.5% interest and then charging an annual fee for a current account or transaction charges like the rest of Europe.

  • Comment number 62.

    Let's be clear. The scale of the financial crises was caused by the selling off of debt on loans that should never have been issued in the first place.

    Yes the official line from leading Economists is that they miscalculated 'Systemic Risk'. No they didn't. They ignored it.

    Home ownership does not automatically require nor make a wealthy nation. It provides the banking system with a commodity with which it can trade whilst it also applies a control measure upon a nation’s public. (Home owners don't Strike) All part of the 'American Dream' that Thatcher Loved so much.

    Yes, Banks provide a service which we pay for by allowing them to make a profit from the investment of the money we pay in. Interestingly, the pre-report written reply to the commission’s proposals from one of the Major Banks (Barclays) also points out the social importance that banks play by 'protecting the public from investment risk' UHM HELLO.

    The commission is trying to be all things to all men. They (and their masters) need to decide what they actually think the agenda is. For me, ultimately, it should be ALL about protecting the Taxpayer from any future bailout. Ring-fencing, Chinese firewalls and more reserved Capital will not guarantee this plain and simple. By way of proof, look at what happened when Banks in the States issued ninja subprime loans to statistically likely defaulters....these were gathered up by way of 'creative' accounting and given a triple A rating as a safe investment.
    An ignorant Government, a risky, greedy Banking system, regulators asleep at the wheel and a complicit public as I've said many times.

    The Tax paying public need protection; The Politicians are our trusted servants and should be obliged to provide that through whatever legislative process it feels is necessary to circumnavigate the culture and arrogance of the Banking System.
    Unfortunately, this report is not it.




  • Comment number 63.

    Well, I had a quick read of the summary. Will have a proper look later. It all looks like too little too late. The report still has a built in assumption that there will be more banking crises in the future, and to deal with that it wants to protect the retail deposits. So basically it's just 'paper over the cracks' a system update rather than a revolution. There is no attempt to get to the root of the problem, and resolve it. The regulars will know that my view is that FRB is the real flaw, and that will continue. I wonder just how much difference it would have made if these changes were in place prior to the credit crunch. Certainly the suggestion that only capital ratios of 10% will be needed seems pathetic to me. Still, we are in the midst of a sovereign debt crisis created on the back of the banking cirsis now. These measures will do nothing to help that. Only proposals along the lines of Postive Moneys could have helped to have dug us out of the hole we have fallen into. But there is no sign of that, and as a result I still think the collapse of the banking system is inevitable. Time will tell of course, but we have plenty of time to sit and wait. I confidently predict the propoganda machine will be pumped up to the max by the government when the final report comes out, saying they will implement big changes. The truth will be the opposite. We will then subsequently watch the whole pack of cards fall down around them, as current events over take what it merely a white wash solution. Jens O Parsons summed it up well; "Change comes slowly; there was no perceptible improvement in these affairs in the entire 20th century. Real progress usually is borne only of crisis at best, disaster at worst". Looks clear to me, that only total disaster will force sensible change.

  • Comment number 64.

    45. At 11:01am 11th Apr 2011, doctor bob wrote:

    > That hows how naive this Commission bunch is. Each bank allocates
    > each account an unique number based on location (or organisational unit)
    > an 8 digit number so it works in BACS, and takes a few other factors into
    > account. There's a strong likelihood that when converted to fit another
    > bank the account number would be duplicated.

    Get real - it's a one-byte change! If banks can't organise that, then they deserve to be broke!

    Jeeez, some people have more front than a double decker bus! So don't try that on again (LOL).

  • Comment number 65.

    This report is something of a smokescreen. Nothing in the report would have prevented Northern Rock failing. The area that needs an independent review is bank supervision. Proper supervision would have prevented Northern Rock and the other bank failures.
    Robin Baker

  • Comment number 66.

    #19. At 09:03am 11th Apr 2011, abune wrote:

    "It is well worth considering whether there is in fact a direct relationship between our relative economic decline and increasing home ownership. Maybe this striking obsession with home ownership in the UK has diverted too much money and effort away from productive industrial capacity."

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Absloute nailed on fact. Well said.

    It's about time someone pointed out home onwership for the general populace is a fairly new concept in Britain. Remember my previous assertion (let's not get into protracted debate again) debt = profit. Get everyone mortgaged and generate profit, if they can't buy a home them send 'em to university and hit 'em with fees, if you could make it about £60K that would be dandy.


  • Comment number 67.

    looks like The world Bank has figured out a solution.
    http://www.bbc.co.uk/news/world-13032938

    "the World Bank says that there should be far more focus on building stable government, and on justice and police, than on health and education."
    Dont want to educate the masses, or keep them healthy. Think what might happen.
    I find this disturbing. Or perhaps its just me.

  • Comment number 68.

    #2. FORENSIC DEBATE wrote several very silly things....


    including "Britain has always been a homeowner-based economy".

    The absolutism of the use of 'always' indicates a lack of compression and the most elementary study of history and the statement only serves to exonerate the whole system. You are repeating nostrums - that are false.

    What went wrong is encapsulated in your remark.

    The price of property has in the end to depend on the ability to repay the loans advanced on its so called security - it is very little to do with scarcity.

    The idiots running our economy suffer from a collective ignorance of asset inflation and the damage it does and has done to British competitiveness (both directly in keeping wages far too high out of necessity - workers must live near where they work- , and indirectly in congestion even if they live too far away.)

    There is I believe an enormous structural void in the whole field of economics that ignores the assets of a country except in so far as they can be sold off. For example forests can be cut down and the asset vanishes but all of the revenue generated boosts GDP. This attitude by economists to assets causes asset price inflation to be seen as a good thing when in reality it is not. I have consistently banged on about this particular field on governmental and economic incompetence and I'll not name the fools yet again here.

    The sheer stupidity of "FORENSIC DEBATE"'s statements is breathtaking!

    We have to deflate private debt BEFORE we can get the economy going. (I'll also refrain from providing historical and well researched evidence yet again.) The price of money has to rise to a more normal level - and by more normal I mean that prevailing over the last millennium - since the flood! The complete nonsense of saying property has risen in price even since Caesar (Julius or any other) is at variance with the facts as there are no facts available in the dark ages and precious few in Roman times.

    Furthermore property has dropped and risen in price depending on the productivity of the land. Presently we need a 50% or more drop in property prices because we are completely uncompetitive at present levels as we cannot get the required production from the land (be if farm or non-farm) at the present price levels.

    The idiot regualtors (in HM Treasury, the FSA and the Bank of England) as well of the politicians (see Gordon Brown's admission today) who followed their lead created this problem by permitting the inflation to get beyond all rationality. The only control mechanism is interest rates and these have been far too low for most of the last decade and are very much too low today. What this has done is to reduce the price of money to ludicrously low levels. This collapses the economy far more certainly than any other mechanism. The depression and economic collapse being caused by this stupidity will be far worse than the last three years and indeed far far worse than any present austerity. John Vickers is not being paid to look at this - because like Gus O'Donnel's blocking of the phone hacking enquiry before the election (see today's Guardian) it would 'frighten the horses'. If fact one can see the dark hand of Gus O'Donnel in the financial mess too as he was Permanent Secretary of the Treasury at the start of the collapse at the turn of the century and because of his defective economic education (which is a common feature of all senior economic advisers) massaged the system to ignore the importance of asset price inflation.

    The country needs proper accounts that take proper cognisance of the Nation's assets!

  • Comment number 69.

    Sometimes you really wonder at the power of vested interests.

    In February 1995, Barings Bank failed and the principal reason behind that failure was that the retail part of the bank was not* ring-fenced from the investment bank (aka 'casino') part.

    So here we are in 2011, well over a decade later, discussing whether the retail part of a bank should be separated from the 'casino' part.

    Obviously, we have all been asleep fom ten years and have just woken up or the power of vested interest has over-ridden all other considerations.

    * Strictly speaking, Barings did have a ring-fencing mechanism which separated retail from investment funds but it was removed at the behest of some greedy Barings directors, with the compliance of the BoE. Not their finest hour.

  • Comment number 70.

    There was never a reason for a taxpayer bail-out.
    The fact that it happened serves to prove that investment/retail games are (at present) too easy to play and will continue to prove too easy to play. These huge investment banks have the best accounting minds in the business; could you or I come up with derivitive bundless that rated AAA but were really worth DDD? Could you or I have come up with credit default swaps that allowed pro/con betting (even against soverign debt)?
    SPLIT RETAIL AND INVESTMENT UNDER THE LAW.

  • Comment number 71.

    What of the malign influence of the CDO (Consolidated Debt Obligation)?

    Is this Retail banking or Investment banking? This was/is the mechanism used by investment bankers that collapsed Northern Rock (and may US banks and indeed States).

    Has anyone found any definitive statements in John Vickers's draft report about where this sits in the Retail/Investment split?

  • Comment number 72.

    Capitalism ..is un-natural. What banks, financials owe their existence to.

    .. because it would force them to raise and retain more capital (which is expensive), ..

    "The big banks will claim that putting their retail banks into subsidiaries would impose significant extra costs on them - because it would force them to raise and retain more capital (which is expensive), and it would increase what they pay to borrow. Their fear is that these incremental costs would put them at a disadvantage compared with their international competitors."

    "Perhaps more importantly, the Commission is convinced that the social benefits of the reform - in respect of reducing the likelihood of destabilizing financial shocks that increase unemployment and cut growth - would significantly outweigh the costs."

    cut growth .. do they actually hint .. on real growth .. growth that matters .. not paper-growth .. that banks and financials .. create by the tonne .. only to siphon it .. directly .. via bonuses .. into their pockets

    "The Commission has also taken steps to reassure the government that it doesn't have a great deal to fear from getting tough with the banks and implementing the change: on its analysis, even if big banks such as HSBC or Barclay's were to move their respective head offices abroad in protest at the reforms, the loss of tax revenue and the damage to the success of the City of London would be limited."

    .. the loss of tax revenue? .. would be limited? .. what does that mean? .. that they hardly pay anything .. to really matter

    .. to reassure the government .. their ignorance apparent .. no better .. than the general public .. act and react ..under panic ..

    .. a great deal to fear .. could it be .. any more vague .. revealing what they actually are .. a bunch of scardy cats ..

    "The interim report says: "The Commission's view is that the reforms of the kind contemplated...would support the competitiveness of the economy and would be likely to have a broadly neutral effect on financial services."

    .. broadly neutral effect on financial services .. banks ..coming out ..unscathed .. nothing loosing .. nothing lost ..

    "Perhaps because of that, some will claim that the Commission has been too timid - in that it has rejected more radical alternatives, such as breaking up the banks, imposing formal limits on their size, prohibiting them from using depositors' cash to make loans, or massively narrowing the range of their permitted activities."

    .. has been too timid? ..

    .. prohibiting them from using depositors' cash to make loans, ..

    .. or massively narrowing the range of their permitted activities.

    .. reading between the lines .. gambling it profusely .. betting it .. playing craps with it ..
    built on .. is un-natural .. what banks ..financials ..owe their existence to ..

  • Comment number 73.

    57. At 11:34am 11th Apr 2011, Justin150 wrote:

    > As long as banks are run as commercial businesses there is a possibility some will fail.

    As long as the consequences for individual bankers are very high, then they would ensure that failure is rare.

    > splitting the bank into 2 and keeping the retail arm "safe" achieves nothing when it
    > is the investment arm that fails - if the investment arm is too big too fail.

    Then split them again.

    > As soon as you get into detail it is clear that it is impossible to draw a neat line
    > between retail and investment banking.

    Then punish the individuals as well as the shareholders.

    > I see the bank bashers are out in force.

    I see that the economy is in ruins, the deficit is out of control, there is too little money to buy the army equipment we need, the NHS is underfunded, the nuclear deterrent is threatened, Portugal, Ireland and Greece are on the ropes, and inflation is running wild.

    There's still a great deal of bashing in store for our greedy, grasping, socially useless bankers, Justin150!

  • Comment number 74.

    "The thinking behind the ring-fencing recommendation is that if the wholesale or investment banking arm of a universal bank were to go bad, the retail operation - which looks after our savings, lends to business and moves money around - would not be tainted."

    not be tainted?.. how magnanimous .. they are .. to allow .. a modicum a activity .. that actually benefits people .. their concerns are heart-wrenching ..

    though .. it is already tainted .. to the hilt .. banks .. determined for huge profits .. solely for the ingratiation .. of their CEOs .. why would they ever .. be interested .. to protect savings .. lend to business .. move money around .. actually interested .. about growth ..

    what moves them .. what kicks them around .. the highest returns for their capital ..ever possible ..

    "These banks' balance sheets are five times the size of the British economy."

    and you do not get .. high returns .. by protecting savings .. lending to businesses .. moving people's money around ..

    the very system itself .. prohibits them .. for doing so .. the capitalist system .. the premises .. upon which it is built-on ..proscribes and drives their actions ..

    .. in an environment which they have fostered .. where the laws of the jungle .. take precedent .. competitiveness .. fierce .. with no bounds .. all in the service of a vile cum deranged worthy cause .. accumulating wealth .. to an ever narrower segment of societies ..

    and in the process .. eliminating .. exterminating .. the very individuals .. by which societies are sustained

    a mentality so profusely embedded .. in the way capitalist system .. is handling debts .. at all levels .. from sovereign countries debts .. to small claims from single individuals .. ruthless destruction of debtor .. bringing them to their knees .. unable to sustain and grow .. cutting all lifelines available ..

    though repeatedly .. it has been revealed .. that nature itself .. doesn't behave as such .. that there is an economy .. that evades bankers thinking .. seeped deep into assumed predator-prey relationships .. though the predator .. would not kill .. all the prey .. at its sight .. in mind to conserve .. energy .. its limits finite, the constraints imposed by its very own structure .. a deterrent .. in killing every prey .. its eating capacity .. limited as well ..

    the environment .. fostered by banks .. capitalism itself .. does away .. with these limitations, the constraints referred to in John H. Holland's .. emergence, from chaos to order .. nature provides itself .. all in the mind .. of creating a sustainable environment

    banks financials .. have created an unsustainable environment .. for individuals to grow in ..

    competition has its limits .. capitalism .. its premises .. upon which ..it has been built on .. is un-natural .. what banks ..financials ..owe their existence to ..

  • Comment number 75.

    Basically, it is still only about deciding the size of financial bullet, hence is just a 101% con.

    Ultimately, if a UK retail bank got into severe difficultys then it is still taxpayers who pay the bill, hence this is purely about UK taxpayers covering/insuring the costs of hightly profitable big business.

    Presently, UK banks receive FREE taxpayerinsurance.

    Presently UK banks receive MUCH lower loan costs because UK taxpayers provide a FREE SERVICE of insuring the banks.

    As soon as taxpayer funding is removed from banks failure, then banks will have to pay susbstantially more to borrow money, also removing attatchment and access of/to retail/personal depositors savings, means the overal accounts of gambler banks will depreciate greatly, especially as their gambling funds are basically invisible/electronic values with no physical bearing on ability to pay.

    All this does is design a more politically acceptable collateral damage Black Death financial senario.

    In any event, the public/taxpayers/citizens CANNOT pay any further losses of banks, hence even the present banking guarantee is not worth the paper it is written on and is basically just part and parcel of the whole banking/financial deception of wrorth/value which is 101% founded upon invisible "confidence".

    Fact is, the whole financial/banking structure is based upon "confidence", it is not based upon any relative physical value/worth of any real meaning.

    Even the UK bailout of banks involved creating £200 billion out of thin air, non existing money, via government bonds- quantative easing.

    This quantative easing aactually also damaged UK citizens via it's inflationary effect which devalued the £, hence foreign goods etc are more expensive because the £ is worth less due to quantative easing.

    Hence, fact, invisible money was generated by government to fill the invisible holes in banking finance.

    What is serious, is that banks, instead of being quite conservative in behaviour, have essentially turned into a grander " Ladbrokes" but in this instance it is the banks themselves who are the gambler punters and who's gambling practices are now built into the whole financial wellbeing of the economic cycle and which inflation is a basic requirement of profitability.

    These gambles are the foundation basis of inflation.

    NOTHING needs to constantly rise in price.

    The main price rise inflation is specifically energy and a maintained shortage of energy (oil) due to increasing demands upon dwindling oil resourse%2

  • Comment number 76.

    RP wrote

    "..prohibiting them from using depositors' cash to make loans..."

    Err, so they would have to go to the money markets to get the capital to make loans? Is that not what caused NR's problems in the first place?????

  • Comment number 77.

    64. At 12:06pm 11th Apr 2011, Jacques Cartier wrote:
    45. At 11:01am 11th Apr 2011, doctor bob wrote:

    > That hows how naive this Commission bunch is. Each bank allocates
    > each account an unique number based on location (or organisational unit)
    > an 8 digit number so it works in BACS, and takes a few other factors into
    > account. There's a strong likelihood that when converted to fit another
    > bank the account number would be duplicated.
    Get real - it's a one-byte change! If banks can't organise that, then they deserve to be broke!
    ================
    Would you like to elaborate! How will one a byte change indicate where that account is held and make it unique among all bank branches?

  • Comment number 78.

    #2

    "Homeowners not to blame for accepting cheap Loan to Value Mortgages (LTV) up to 125%."

    So people who took on too much are too be absolved of blame? Surely them overstretching is the same as govts overstretching and the banks themselves overstretching?

    As said before, no one group is too blame solely - all participated and all must accept this before we can move on otherwise the "justice" you speak of is just lynching

  • Comment number 79.

    67. At 12:17pm 11th Apr 2011, Averagejoe wrote:
    looks like The world Bank has figured out a solution.
    http://www.bbc.co.uk/news/world-13032938

    "the World Bank says that there should be far more focus on building stable government, and on justice and police, than on health and education."
    Dont want to educate the masses, or keep them healthy. Think what might happen.
    I find this disturbing. Or perhaps its just me.

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    It isn't you, it is disturbing, but then it comes from the World bank so it would be.

  • Comment number 80.

    71. At 12:31pm 11th Apr 2011, John_from_Hendon wrote:
    What of the malign influence of the CDO (Consolidated Debt Obligation)?

    Is this Retail banking or Investment banking? This was/is the mechanism used by investment bankers that collapsed Northern Rock (and may US banks and indeed States).

    Has anyone found any definitive statements in John Vickers's draft report about where this sits in the Retail/Investment split?

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Nope, can't find anything either, I was looking for clarification on CDO's as well. If you find anything make it public please because if we're honest, this is the entire issue. It should be investment I but the origins are retail securitisation so open to abuse and interpretation I'd wager.

  • Comment number 81.

    The commission confirms that these banks contribute very little to the national economy and their threats to move their HQ elsewhere have little credibility.

    Despite this, they do not have the bottle to take effect action which would protect us from another disaster.

    Unless there are clear rules preventing the retail arm funding the gambling arm then the banks will continue to use customers money to fund disastrous deals, safe in the knowledge that the retail arm is under the safe keeping of the government.

    As taxpayers we continue to give free insurance to the risks of spiv banks.

    Basically, business as usual.

    How much did this commission cost us?

  • Comment number 82.

    I can remember, and I am not THAT old, when there were several banks in competition, successive governments of all persuasions have allowed them to be swallowed up. As the Government is now the largest shareholder in several, what do they intend to do? Sit on their hands? Perhaps, they can do little, when the owner is not a British Company. Santander swallowed up some High Street Names, what can they do now? Has the EU stated, as in the case of Lloyds, that they are too big?Not yet!

  • Comment number 83.

    Britain has always been a homeowner-based economy, not like the economies of France and Germany, where the majority of people live in rented accommodation. Homeownership made Britain one of the wealthiest and stable economies in the world.
    Homeownership has always been the foundation of the British economy and credit ratings upon which stability and confidence depends.
    ------------------------------------------------------------------------------------------------------------------------------------------

    Where do you get your ideas from? This is almost the direct opposite of the truth. Britain was at its most prosperous, relative to the rest of the world, in the years before the first world war. Home ownership was at only 32% in 1953. Throughout the subsequent years of de-industrialisation, owner occupation rose to 43% in 1961, peaking at 70% in 2000. By contrast, during the height of Empire, Britain was clearly anything but a homeowner economy. Basically all of the working class and most of the lower middle class lived in rented accommodation.

    If you really believe that this country has been an economic powerhouse since 1960, compared to France and Germany, then you are, I'm afraid, living in a parallel universe. It is well worth considering whether there is in fact a direct relationship between our relative economic decline and increasing home ownership. Maybe this striking obsession with home ownership in the UK has diverted too much money and effort away from productive industrial capacity.

    ===========================================================

    I think most people understood the original comment. The mistake was to use the word ' always' as opposed to say 'relative' (to French and Germans at the same time). Sadly your ideas are just as bizarre. Britain was at its wealthiest before the first world war? For who? The wealthy landowners and companies who owned these rentals and had somehow obtained the land in the first place? And who also at the same time utilised the 'empire' for their greater wealth - that empire most of their tenants were shortly to be expected to die for in the trenches and whose descendents like you and I are now expected to apologise for due to the mistreatment of the natives. No - greater home ownership in the UK has only arisen as an alternative to properly managed tenancy due to the Uk rich and powerful and their banking allies inventing a new way of keeping many people in even bigger debt. After all it makes bigger profits for them.

  • Comment number 84.

    Re #64. At 12:06pm 11th Apr 2011, Jacques Cartier wrote:
    and, #45. At 11:01am 11th Apr 2011, doctor bob wrote:
    --------------------------------------------------------
    Not sure the account no. is that important. It is Standing Orders and Direct Debits, their correct identification and easy & secure {in all senses} transfer to the new bank that is the key.


  • Comment number 85.

    So, would 10 percent capital ratio have prevented the taxpayer bailouts from the 2007-8 catastrophe.

    No.

    So this is nowhere near good enough. Simples.

    I can see nothing short of full reserve banking for the retail side truly removing risk to the taxpayer.


  • Comment number 86.

    So the billion or so pounds a year that RBS pays to the government for insuring its Toxic assets is free?

  • Comment number 87.

    67. At 12:17pm 11th Apr 2011, Averagejoe wrote:
    looks like The world Bank has figured out a solution.
    http://www.bbc.co.uk/news/world-13032938

    "the World Bank says that there should be far more focus on building stable government, and on justice and police, than on health and education."
    ======================
    Is it possible to focus on health and education without stable government?

  • Comment number 88.

    76. At 12:50pm 11th Apr 2011, yam yzf wrote:
    RP wrote

    "..prohibiting them from using depositors' cash to make loans..."

    Err, so they would have to go to the money markets to get the capital to make loans? Is that not what caused NR's problems in the first place?????
    ------------------------------------------------------------------------------
    I'm not sure he did. Where?

    NR's problem was a cash run on the bank, mostly in its 'home market'. When this was not abated by assurances from various sources, the share market problem started to kick in and then the problem was spreading across Britain.

    The questions to ask would be:
    1. Is a 10% reserve enough on a deposit dependent bank?
    2. Should there be a brake on stock exchange transactions (another firewall) for banks and similar financial institutions?

  • Comment number 89.

    These are extracts from the Report of the Commission:

    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

    2.95 Aims:
    The Commission’s recommendations will aim to:
    1) reduce the probability and impact of systemic financial crises in the future;
    2) maintain the efficient flow of credit to the real economy and the ability of households and businesses to manage their risks and financial needs over time; and
    3) preserve the functioning of the payments system and guaranteed capital certainty and liquidity for small savers including SMEs.

    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    Maintain the efficient flow of credit ??????????????? Small business?
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    4.86 One concern about retail and wholesale/investment banking being in the same corporate group is that, in a crisis, managers of a corporate group will typically seek to support all entities within that group even if they are not legally obliged to do so.50 Severing legal obligations is arguably not sufficient to prevent problems in one part of the bank spreading, because reputational concerns will lead banks to provide support to the troubled part even if it causes distress across the group. In the recent crisis, a number of banks provided greater support to their off-balance sheet entities than they were required to legally. To address this concern through a ring-fence alone, it would be important that the rules around transfers of capital are sufficiently robust to prevent bank managers from depleting the capital of the retail bank below minimum safeguard levels. In addition, the contagion caused by the failure of one bank, or by part of one bank, should be more limited as a result of the package of measures considered in this Interim Report and being progressed internationally to improve the resilience of the financial system.
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    In other words the Commission has no recommendations for controlling the transfer of capital through a 'fire-wall' ... IT IS ALL SPECULATION AND SPIN & NO DETAIL
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

    4.87 Some form of retail ring-fencing appears therefore preferable to full separation to the extent that: a) the rules around the subsidiary are firm enough to secure most or all of the benefits of the reform; and b) the costs of ring-fencing are substantially lower than those of a full split. Unless both of these conditions hold, however, the balance of arguments might favour strict separation.
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    The interim report has been mis-quoted here as 'full separation' is still a full possibility and is subject to analysis and costings that have not been provided?
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

    4.108 Based on its work so far, the Commission’s current view is that the social benefits of a retail ring-fence are likely to outweigh its social costs. The offsetting benefits of a ring-fence may be large, and a ring-fence would only have to be judged to have a relatively modest impact on the probability and/or impact of financial crises in order to produce a net long run increase in UK GDP. Annex 3 sets out a preliminary approach to cost-benefit analysis in more detail. The Commission would welcome views on how this should be developed.
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    'Outweighing of social costs'

    A GCSE economics student can do better than this !!!!

    Biting my tongue here ... the Commission have done some good work on this ... but as I wrote yesterday ... the main thrust of the Report on the most important issues and detail can now be seen as weak and lacking strategic direction and thinking.

    The report appears to be about a quick fix for getting business as ussual ... and there is not enough strategic input about the the role of the banks in serving the country.

    The impression I get is that, we are all dependent on the banks from reading this Report ... whereas the Report should be setting out how these banks can best serve the UK as a nation and its entire population.

    I cannot believe what I hear when I hear these so called experts on TV and radio... especially those who claim to have read this report?

    The Report takes us very little further forward in dealing with the ongoing banking crisis in terms of strategic UK financial management.

  • Comment number 90.

    I see from the FT today www.ft.com/cms/s/0/a31e787c-63a9-11e0-bd7f-00144feab49a.html#axzz1J9O5oGbK that US regulators expect to file over 100 lawsuits against failed executives and directors of failed banks.

    Now that would concentrate the minds of Bankers if it was included in the IBC’s recommendations. First on the block should be those that appointed RBS’s Chairman – who was apparently devoid of any banking experience.

  • Comment number 91.

    It strikes me that if all the banks have to 'strengthen their balance sheets' then this will take a lot of money out of the economy, more than is actually necessary. My solution to this is to insist that they put aside, into a seperate fund covering the industry, a proportion of their profits each month. (Much the same as reputable double glazing firms do to cover guarantees) The fund should not be permitted to invest in the same lines as banks, for example anything such as property related portfoloios, but in such things as gold, silver and platinum etc. This way if the banks do cock up there is a fund to help them out instead of us tax-payers. Also they will be able to lend again. It also means that an individual bank could call on this reserve if it was alone in potentialy failing.

  • Comment number 92.

    Or the government could state that the first £100k of all savers assets are protected in the result of their bank going belly up, or insist that banks retain insurance for peoples accounts and/or ensure their customers are aware of how much insurance they have (and then not tax the insurance into extinction).

    Then let the banks go to the wall; no more moral hazard, deigning more responsibility on customers to vote with their feet.

    Thats the LEAST they could do.

  • Comment number 93.

    It is a small step in the right direction. The reforms will only be complete though with a full separation of retail and risky activities and an end to fractional reserve banking. Such a reform once passed will over a period of time improve all of our quality of lives and slow down the pace at which we are destroying our planet.

    For a more detailed debate see:

    http://www.positivemoney.org.uk/

  • Comment number 94.

    May i suggest the Commission uses Persil next time.
    "it washes whiter!"

  • Comment number 95.

    Before anyone raises proposals on the Banking System they must first understand that Money is solely created by Private Banks. That when you put your money into the Bank and somebody borrows money, they are not borrowing your money but newly created money. Only 3% of the money supply was created by our Government. The remaining 97% is created by the Banks. That means that we rely on someone taking out a loan inorder to maintain the money supply.

    In 1963 the debt free component of the money supply was 21% - seven times larger.

    Fractional Reserve Banking is the mechanism which hides the fact that Banks create money from small reserves of cash deposits. This credit rolls around the system generating more debt money and leads to rising prices and reduced purchasing power in peoples savings and wage packets. The expansion of the money supply by Private Banks leads to speculation in the commodity markets such as Food and Oil. This therefore magnifies price inflation as Banks are betting on rising prices. The higher cost of oil leads Farmers to reduce their farming activities which further increases Food Prices. Investment Banks are the only winners in this scenario.

    The money stock now relies on mortgage debt to keep the economy afloat. Unfortunately, inorder for one person to pay off their debts each month they require money which is mostly created through other peoples debt. We now basically spend each others debt.

    We need to prevent Banks from creating money from nothing, and only allow the Government to restock the money supply with debt free money which can be distributed through Government Spending via NHS, Police, and other Government Construction Projects. banks should only be allowed to manage money - NOT CREATE IT.

  • Comment number 96.

    62. At 12:03pm 11th Apr 2011, lacoaster wrote:

    "...Home ownership does not automatically require nor make a wealthy nation. It provides the banking system with a commodity with which it can trade whilst it also applies a control measure upon a nation’s public. (Home owners don't Strike)..."

    ++++++++++++++++++++++++++++++++++++++++++++++

    Mortgagors, i.e. debtors falling for being flattered, by being called "homeowners", is perhaps the greater deception.

    True homeowners very much *do* strike, which is why all is done to prevent people becoming these.

    (The most effective method being keeping the incapacitated elderly alive in expensive nursing care until all the equity is gone, and so nothing left to bequeath to the working generation. Effective preventative medicine is used against anything that would kill us quickly, cleanly and cheaply).

  • Comment number 97.

    Robert,

    I think that when the announcement of "reform proposals" is followed by a jump in the price of banking shares, it's very telling about the worth of the reform.

  • Comment number 98.

    @45, 64, 77:

    64's one byte change may be optimistic, but a simple solution would be:

    * all portable accounts could have a currently-unused sort code (there must be enough of these) plus a normal 8 digit account number
    * each bank would then need a database to match the portable sort codes and account numbers of its customers to the relevant accounts on their internal systems.

  • Comment number 99.

    re #82
    The real problem came with Big Bang in 1986 when the Conservatives freed various markets to cross compete and takeover & merge.

    Would 'naked shorts' in particular, and much other short selling have been allowed under the old LSE division between 'Brokers and 'Jobbers?

  • Comment number 100.

    62. At 12:03pm 11th Apr 2011, lacoaster wrote:

    "... By way of proof, look at what happened when Banks in the States issued ninja subprime loans to statistically likely defaulters....these were gathered up by way of 'creative' accounting and given a triple A rating as a safe investment..."

    +++++++++++++++++++++++++++++++++++++++++++++++++

    The *very fact* that the borrowers were likely to default is what made the mortgages attractive to nasty greedy buyers.

    That's because in the US, lenders still have the remedy of Foreclosure (HRA prevents that here). That means the whole title, along with the *equity* is transferred to the lender. As long as the market has risen it's legalised theft from the poor by the rich.

    Anyone who suspected GWB would change his mind on legitimising clandestine immigration started unloading the stuff anywhere at any price. The raters were perhaps in on this too...who knows?



 

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