Acclaim for banking shake-up plan


Sir John Vickers said the bank reform would be "strong but flexible"

There has been widespread support for a government-backed commission that has recommended UK banks ring-fence retail from investment banking.

The Independent Commission on Banking, led by Sir John Vickers, said it would "make it easier and less costly to resolve banks that get into trouble".

The ICB called for the changes to be implemented by the start of 2019.

Chancellor George Osborne said the report would mean UK banks could remain competitive.

"The government wants Britain and the City of London to be the pre-eminent global centre for banking and finance. We want universal banks headquartered here with all the advantages that brings," he told Parliament.

"The global investment banking operations of UK banks can continue to be as competitive as any in the world."

He also said that he planned to stick to the report's timetable.

There was some criticism from employers' group the CBI, which said some aspects of the report would damage the competitiveness of UK banks.

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Arguably there has been nothing quite as significant for banks in more than a century”

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The head of the union umbrella body the TUC said that the report did not go far enough.

Brendan Barber said it was "merely tinkering around the edges of what is one of our absolutely central economic problems", which was how to make banks useful and "get responsible credit flowing again".

The shadow chancellor, Ed Balls, said he was "deeply sorry" for the part the last government played in the regulatory failures that led to the banking crisis.

He described the report as "important and authoritative", while the ring-fence proposal was "tough and radical". But he said it should be "the start, not the end point for reform".

"To help get the economy growing again, we urgently need to increase net lending to small businesses, which the government's deal with the banks has failed to do, and we need action on issues like pay and bonus transparency."

Sir John Vickers said the report was "fundamental and far-reaching".

Separate entities

The report recommends that ring-fenced banks should be the only operations granted permission by the UK regulator to provide "mandated services", which include taking deposits from and making loans to individuals and small businesses.

It says that the different arms of banks should be separate legal entities with independent boards.

ICB main recommendations

  • Ring fence retail from investment banking
  • Keep 17-20% of certain assets as "loss-absorbers"
  • Lloyds branch sale to be opportunity to bring in competitor
  • New system to help customers switch current account
  • Reforms to be implemented by 2019 at the latest
  • Cost to banks of between £4bn-7bn

Another of the ICB's recommendations is that banks must have a buffer to absorb the impact of potential losses or future financial crises - of at least 10% of domestic retail assets in top-quality form, such as shares or retained earnings.

That is a stiffer target than the 7% recommended by the international Basel Committee on Banking Supervision.

It also says the biggest banks should go further than this and have a safety cushion of between 17% and 20% of assets, made up of highest-quality assets topped up with bonds that can be easily converted to equity.

The business lobby group, the CBI said this would not help business.

The CBI's deputy director-general, Dr Neil Bentley, said: "The proposals on capital requirements are out of step with internationally agreed measures underway so will increase the cost of lending for UK businesses, putting them at a disadvantage to their overseas competitors."

The commission also recommends that steps should be taken to make it simpler to switch bank accounts, something that was welcomed by the CBI.

The ICB wants a free current account redirection service to be formed by September 2013, with an improved system to catch all credits and debits going to a customer's old, closed account, including automated payments on debit cards and direct debits.

Costs and benefits

The BBC's business editor, Robert Peston, called it the most radical reform of British banks in a generation, and possibly ever.

He said it would be hated by the biggest UK banks, Royal Bank of Scotland (RBS) and Barclays.

Chancellor George Osborne said the commission had "done a very good job"

He pointed to the report's analysis of the costs and benefits of the reforms, which estimates the social costs of its proposed reforms - the costs for everyone in the UK, rather than just for banks' creditors and investors - as between £1bn and £3bn a year.

That compares with the annual £40bn cost of lost output that follows periodic financial crises, he said, adding: "If the commission's calculations are even vaguely in the right ballpark, it will be very hard for banks to resist the changes."

The British Bankers' Association (BBA) said banks had already begun the process of making themselves safer.

"UK banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by UK, EU and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained," the BBA said.

'Into the unknown'

Michael Symonds, an analyst at Daiwa Capital Markets, said there was a danger that the changes would damage UK banking's international competitiveness.

Ed Balls says the government "must implement this report"

"Into the unknown we go, in terms of the recommendations," Mr Symonds said. "The main issue really is the fact that the UK is going it alone on their structural reforms and the potential damage it will do to the competitiveness of the UK banking sector and economy as a whole."

Bank shares all fell, with RBS closing down 3.4%, HSBC down 2.4% and Barclays and Lloyds both down 1.6%.

There is a view that regulating UK banks could push some to leave the country in search of a place where regulation is lighter.

Debate in the papers

Commentators are divided over the effect of ring-fencing the investment from retail side of banks.

David Wighton argues in the Times it is a knee-jerk reaction, creating regulation which will "strangle any recovery".

However, the Independent's Mary Ann Sieghart says lending to businesses will be allowed inside the ring-fenced retail arm, meaning the cost of loans will not rise.

In the Financial Times, the former chairman of the Royal Bank of Scotland, George Mathewson, says splitting banks' activities is not the real danger to banks. He says imposing higher capital requirements, which will reduce bank returns and their ability to lend, poses a much greater threat to the UK's economic recovery.

Sir John said he thought this was unlikely, at least as far as High Street banking was concerned.

The ICB was set up last year to look at how taxpayers could be protected from future banking crises.

The credit crisis ultimately led to the government nationalising Northern Rock and part-nationalising Royal Bank of Scotland and Lloyds.

The government now has stakes of 83% and 41% in RBS and Lloyds, respectively.

The ICB said its proposed reforms could result in a pre-tax cost of between £4bn ($6.4bn) and £7bn for Britain's banks, something Sir John said would be unlikely to be felt by individuals.

He said the cost would be about one-tenth of 1% to customers, with the banks themselves absorbing some of the costs.

"How much of this passes through to the customer? It's not going to be a large amount whatever. We believe that most of the cost increase will be felt outside the UK retail ring-fence, rather than within the arena of UK economic activity. We also believe that a portion of the cost increase will be absorbed by the banks, so it won't all get passed through."


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  • rate this

    Comment number 112.

    The argument given by the banks against ring-fencing, is that their costs of borrowing on the wholesale market will rise, and they will then need to pass these costs on to their retail customers.
    But hold on a minute....
    The reason they can borrow so cheaply in the first place, is that they are seen by the market to be benefiting from an 'unspoken guarantee' by the British taxpayer!
    No more!

  • rate this

    Comment number 111.

    Sensible proposals, should have been in place some time ago... But all you banker-bashers: The Financials Services sector was the biggest tax paying industry in the UK (£53bn+) in 2010. And that was a bad year. Whether you like it or not, you are better off with them than without them... Don't shoot the golden goose.

  • rate this

    Comment number 110.

    I recall that we used to have community based financial institutions that were of the people and for the people. They were called "Mutual Building Societies" and Co-Operatives". Following monetarist deregulation, the money from their sale went to their members Are these the same people who now point at greedy bankers, as they live off unearned equity and pensions, paid for by their children?

  • rate this

    Comment number 109.

    Further to my post @101 perhaps these changes will result in more competition by new high street banks starting up,such as Virgin Money for example.The 4 main banks have had things their own way for too long,operating almost like a cartel with their charges etc.Time for similar chaanges to the energy suppliers as well,a break up and more competition there would reduce costs to customers.

  • rate this

    Comment number 108.

    Let me make this clear from the start. I am not financially astute.
    So from a "non-financial expert", it appears that the wealth and future prospects of this country are in the hands of glorified bookies.
    We're all in it together? Not if you are the ones who were directly the cause of this financial crisis!

  • rate this

    Comment number 107.

    I'm not sure that I like the idea of banks being forced to sell branches 'to create competition'. To my mind, it means allowing foreign banks into our banking system on the cheap. Remember it wasn't the retail side of banks' operations that got us into trouble. Mainly, they were successful, profitable & providing a decent service. If they must be sold, give the the Co-operative Bank first refusal.

  • rate this

    Comment number 106.

    Is it just me, or does the banking industry think they have done a good job over the past few years?
    Using this logic, Stockport County had a great season last year!

  • rate this

    Comment number 105.

    Banks were supposed to implement a 10% buffer after the crashes of the 90's. Is this new announcement an additional 10% or just words like the last one? Does this not still leave the taxpayer exposed to the remaining 90% of risk? We really should break up the retail and casino banking sectors to fully protect the taxpayer. It's morally wrong to force taxpayers to underwrite private companies.

  • rate this

    Comment number 104.


    I think the opposite - Mortgages and Loans will actually be easier to attain. If you look at the profits of Investment banks like Barclays you will see that the strong performer has been their Investment arm.

    Take away the Investment banks ability to indirectly access deposits and your left with Traditional banking - deposits and loans!

  • rate this

    Comment number 103.

    The Government should remove it's savers £85000 guarantee. Savers would then be more careful in their investments and banks would have to evidence solid business models in order to secure customers.

  • rate this

    Comment number 102.

    7 Minutes ago
    Why will it take so long to impliment the proposed changes ?

    They are called lawyers!

  • rate this

    Comment number 101.

    From what I can see the main objection proffered by the banks is the potential 6bil cost.Thats peanuts compared to what its cost taxpayers to bail them out plus the guarrenttee of non-failure they currently have.Not before time that taxpayers and retail bank customers get some protection from the folly of bankers.The banks should have shown restraint on bonuses rather than carry on regardless.

  • rate this

    Comment number 100.

    I am old enough to remember when the Bank Manager was a respected member of the community and was always addressed as "Mr. ....".
    Oh well, nostalgia isn't what it used to be.

  • rate this

    Comment number 99.

    In 8 years time?
    No change then, i think this is what politicians refer to as "kicking it into the long grass". No wonder lloyds bank shares are going back up! The headline is meant to confuse. Nothing will happen, no change, nada.

    Nationalise the lot of them, with the utility co's, let the 'market' play with stuff that isn't necessary, ensure the stuff that is necessary gets done.

  • rate this

    Comment number 98.

    Once retail banks are separated from investment banks, where will retail banks invest their capital reserves to ensure their savings and loan products remain competitive? Retail banks will remain linked to the risks of investment banking either directly or indirectly. When investment banks start to fail again will the tax payer be forced to bail them out to ensure retail banks remain afloat?

  • rate this

    Comment number 97.

    We know retail banking should be ring fenced. This is old news.


  • rate this

    Comment number 96.

    74.bridgetonboyu do that.
    They've shown they can't be trusted,nationalise all of them.
    Now that's a thought - but you gotta introduce communism first before you do that.

  • rate this

    Comment number 95.

    Did we not have this exact same report 2 years ago? Nothing seems to have happened apart from a report recommending they do what they were told to do back then, but let's not be too hasty, let's wait for another 8 years before doing it...

    Fantastic! I wonder why more people don't have faith in Banks these days....

  • rate this

    Comment number 94.

    Why will it take so long to impliment the proposed changes ?
    The problem with this country is we dont do instant, dozens more debates before a decision is made.
    God help us.

  • rate this

    Comment number 93.

    As a reform this in my opinion is good. It only defines what a bank can do with your money - and this should have been defined a long time ago. The reform does not stop Investment banks taking your deposit directly (if you want to make a better return), what it does is stop Investment banks having easy access to the deposits of those who are content with making a lower return.


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