Bank reform plans should be tougher, Banking Commission says

Barclays and RBS logos The government is moving ahead with legislation to ring-fence banks' retail and investment arms

Government plans to ring-fence the banks - protecting retail banking from the riskier investment side - "fall well short of what is required", a report has warned.

The Banking Standards Commission wants the government to "electrify" the fence so banks won't try to "game" the rules.

That means regulators having the power to fully break up a bank if it does not follow the ring-fence proposals.

The bank reforms will go before Parliament early next year.


The Parliamentary Commission on Banking Standards, known as the Banking Commission for short, was asked by Chancellor George Osborne to study the draft version of the government's Financial Services (Banking Reform) Bill.

This follows last year's recommendation by the Independent Commission on Banking, which was led by Sir John Vickers.

Sir John concluded that ring-fencing was the best way to protect "core" retail banking activities from any future investment banking losses, such as were seen during the global financial crisis.

The Commission explained

  • The Parliamentary Commission on Banking Standards was appointed in July following the Libor scandal and other episodes that damaged the reputation of banks in the UK
  • It includes MPs and peers and is chaired by Andrew Tyrie, who also heads the House of Commons' Treasury Committee
  • Members include the next Archbishop of Canterbury, Justin Welby
  • It heard evidence from major figures in the banking sector
  • Evidence included a warning from RBS boss Stephen Hester that ring-fencing banks' retail and investment arms could increase the risk of institutions needing to be rescued
  • But Barclays chief executive Antony Jenkins told the commission that his bank was "embracing" the ring-fencing proposal
  • The commission has also heard from Paul Volcker, a former chairman of the US Federal Reserve, about his US proposals to ensure bank safety

The government's proposed bill hinged on three main aspects:

  • ring-fencing or protecting retail banking
  • ensuring that bank losses fall on bank creditors and not depositors or taxpayers
  • making banks better able to absorb losses

But the government's draft legislation was a watered-down version of the Vickers report which proposed quite a high degree of separation, said Andrew Tyrie, chairman of the Banking Standards Commission.

"The proposals as they stand [in the Bill], fall well short of what is required," he said.

"What we've done with the Commission proposals is to put back some of that stiff separation into the ring-fence and then make clear that the key problem - that banks are going to be at the ring-fence all the time, which will be a nightmare for regulators - needs to be dealt with," he told BBC Radio 4's Today programme.

"And the way to do that is to say to banks 'If you don't try to game this ring-fence we won't see the need to separate you.'

"Then they will have a massive incentive to get to a point where banks have certainty [not to be broken up]."

"That is why we recommend electrification. The legislation needs to set out a reserve power for separation - the regulator needs to know he can use it."

Ring-fencing explained

Under the draft bill, ring-fencing would ensure that retail services of a struggling lender can be carried on independently and smoothly even if authorities let the rest of the group fail.

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For example, in the case of a failing banking group, regulators could sell off its core activities - thereby maintaining continuity for depositors - while allowing the rest of the organisation to go through a bankruptcy process.

Secondly, retail deposits (but not pension liabilities) would be ranked ahead of the claims of other bank creditors in the event of a bank insolvency.

Thirdly, banks are to hold a sufficient capital buffer - as outlined by global regulators - which means that if banks do fail, losses can be absorbed by shareholders and other creditors rather than the taxpayer.

Ring-fenced banks would also be prohibited from carrying out a range of investment and wholesale banking activities, including the sale of complex derivatives, which are highly complicated contracts designed to hedge borrowers against certain risks but can lead to heavy losses if they go sour.

But in a concession, the Banking Commission proposal agreed to the use of simple derivatives, such as currency hedges, for banks within the ring-fenced body.

Under the draft legislation, the Treasury would have the authority to decide which banks ring-fencing should apply to, as well as specific activities to be undertaken within ring-fenced banks.

The Prudential Regulation Authority, which will become the UK's regulator for deposit-taking institutions in April under the Bank of England, would have the power to ensure the ring-fenced bank to carry on with its business.

'Common view'

Mr Tyrie has also called on independent reviews of the effectiveness of the ring-fence proposals across all banks to take place at least once every four years.

"Remember at the moment banks will probably behave, but in the long run they will find a way to gaming the ring-fence if they don't have a strong disincentive to do so," he told the BBC.

"In 10-20 years time... people will get complacent. At that point it's crucial to have a set of rules to keep banks well away from testing this ring-fence."

Shadow chancellor Ed Balls said: "As Ed Miliband and I said at the Labour conference this year, if the letter and spirit of the Vickers proposals are not delivered and we do not see cultural change in our banks, full separation will be necessary.

"The Commission is clearly right to say the jury is still out and to demand a reserve power for full separation of the banks."

The Commission's report comes a month after Mr Osborne urged its members not to send the government's proposed reform "back to square one" by "unpicking" the consensus on how it should be carried out.

Business Secretary Vince Cable, who has often been at loggerheads with Mr Osborne over how tough banking reforms should be, said: "I think we originally came out at it from opposite directions, but we've come to a common view that the ring-fencing solution is the best way forward."

"I think he [George Osborne] is quite right to say the last thing we want is to create more uncertainty," he told the BBC.

'Perpetual uncertainty'

However, the banking industry was less enthusiastic about the proposals, saying lingering uncertainty about the future shape of the banking industry threatened banks' ability to lend and to compete.

"The risk here is creating uncertainty," Anthony Browne, the chief executive of the British Bankers' Association (BBA), told the BBC.

"If it's perpetually hanging over the banking sector that individual banks or the whole sector could be broken up at some point, then it's going to be difficult to return to having an investable banking sector that can be customer-focused and globally competitive and do what it should be doing, which is lending to homeowners and businesses."

Mark Field, a Conservative MP whose constituency includes the City of London, also warned of the dangers of uncertainty hanging over the banking sector. He said the 2019 deadline for banks to fully implement the reforms - as the Vickers report proposed - needed to be brought forward.

Mr Cable said the government wanted to "crack on with it".

"We want to make sure that by the end of this parliament we have something proper in place," he said.

"But if there are good proposals coming from parliamentarians to deal with the strengthening of the ring-fence - as Sir John said it has to be effective, that's the whole point of it - then we obviously will have to look at that."


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  • rate this

    Comment number 339.

    Yeah, yeah, blah blah blah. Heard it all before. Remember Basel III, anyone? That went reeeeeeaaaally well, didn't it? The good little banks adhered to every commitment and regulation, didn't they?

  • rate this

    Comment number 338.

    5 Minutes ago
    What have the Banks ever done for us?

    Robbed us.

  • rate this

    Comment number 337.

    326 Jealous of bankers.
    You're probably right that people would happily accept that sort of money if it was legitimate. The crux of people's issue with the bankers is that generally these vast sums of money are earnt immorally and, judging by recent reports, quite dubiously.

  • rate this

    Comment number 336.

    It’s funny, statistics would prove that probably half the people who post on here are either overweight or obese because they can't count the calories in their cappuccino and choc chip muffin but yet they are still clever enough to create a new operating model for the banking industry and solve the economic crisis in their spare time……...pretty astonishing really..!!

  • rate this

    Comment number 335.

    I was never convinced that ring-fencing would be a panacea but having said that if the plan is to separate retail and "toxic" banking then the least you can do is do it properly - if the banks don't have any fear for testing / breaching the rules then they'll do so !

    Potentially we'll end up in an even more uncertain situation then we are in now.

  • rate this

    Comment number 334.

    Hopefuly if the different aspects are separated the domestic sector will be forced to abandon "charging for risk" on domestic loans and mortgages. This idea has been allowed to trickle down from commercial contracts where it is a valid tool to attract investors, However in the domestic market it is essentially a ploy to charge the highest rates of interest to the most vunerable of it's customers.

  • rate this

    Comment number 333.

    It is obscene that the taxpayers are bailing out the banks with hospital beds and education reductions while the perpetrators retire to lives of luxury.

    Banks must be cut down to the point at which they ARE small enough to fail and be left to fail.

    Personal investors should get crash protection but NOT bank shareholders.

  • rate this

    Comment number 332.

    The credit crunch dates from 2007. Since that time, separating banks' retail and investment functions has regularly been put forward as part of the solution. Here we are 5 years later, and the government is sort-of (perhaps) half beginning to do it, subject to some further thought. There is a serious lack of will power on display.

  • rate this

    Comment number 331.

    The goverment through the Bank Of England give the bankers billons to try to stimulate the economy

    When those Bankers walk out of the Bank Of England with the money in there hands they have a choice go right and lend to the high street or go left to the Casino

    I will leave you to work out what choice they make

  • rate this

    Comment number 330.

    I agree with those calling for much tougher banking rules. What happened was nothing short of reckless criminality. There is a huge problem, however, which is that the banking industry is one of the mainstays of the UK economy. If threatened with what they feel is too much regulation (especially where it restricts their bonuses!) the bankers will simply threaten to move their business abroad.

  • rate this

    Comment number 329.

    My bank sent me a letter at the beginning of the month saying they were going to cancel my overdraft.
    I've had that account for 30 years. And right before xmas they decide that a facility I had for free would now cost me £5 a day to use it. I already get 0% interest.
    Let the banks go to the wall. I may as well keep my money under my bed. They do nothing for us and cost a fortune.

  • rate this

    Comment number 328.

    314. spam spam spam spam
    It's all very well splitting banks, but the banking crisis was actually caused by NEGLIGENT retail banking .
    No NO NO, it was caused by corrupt Merchant banks, packing up sub prime mortgages, paying ratings agencies to rate them AAA, then knowing they where all JUNK/RUBBISH , Insuring the certain losses with AIG... . So the problem really is bankers FULL STOP.

  • rate this

    Comment number 327.

    Yes Gordon Brown did create the FSA - and what a completely and didn't he state that he'd stopped 'boom and bust'?
    and didn't he 'spend all the money'?

    Yes the FSA was weak, and GB did nope to to end boom and bust but the banks had too much freedom. No he didn't spend all the money! His handling of the deficit was far better than John Majors govt.

  • rate this

    Comment number 326.

    People are just jealous of the bankers because they're earning good wages. All of the people criticising bankers would 100% take the bonuses and wages if it were offered to them, so they're hypocritical!

  • rate this

    Comment number 325.

    Never mind any new banking rules which I doubt this government will ever impliment. When are we going to start to see criminal prosecutions against some financial sector employees and banks that caused a fair chunk of the problems we now have in this country. Other countries seem to be taking these steps, why not the UK?

  • rate this

    Comment number 324.

    I thought this had been decided to split the retail & investment arms of banks !

    I hope they are not backtracking

    It simply isn't on to have bankers making high risk, high personal return investments with the taxpayer / economy taking all the risks if it goes wrong.

  • rate this

    Comment number 323.

    What have the Banks ever done for us?

  • rate this

    Comment number 322.

    How about sending the people responsable for the Banking melt down to prison. Nobody, with all thats been going on, £375 Billion plus to prop the Financal Services, has been brought to book. Shame on the Regulators the Police and the Goverment of all colours.

  • rate this

    Comment number 321.

    LOL people LOL

  • rate this

    Comment number 320.

    Retail banks collapsed through access to easy money created by the retail/investment/central banks money tree theory.

    There is no "electrification" that will not be crossed within the next 10/15 years causing the next bust, except separation.

    The current political idiots are no better than the last lot of corrupt/idiots and only caring about themselves and hoped for re-election.
    Never happening!


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