Monday 12 September 2011

Independent Banking Commision Report

Finally today after almost a year of anticipation the Independent Banking Commission has released its report, a mere 363 pages (rather too much to digest with my cereal this morning). Pulling no punches it recommends the full ring-fence option for UK retail banks:

To achieve the purposes of ring-fencing, retail banking activities should have economic

independence. This requires, first, that the UK retail subsidiary of a wider banking group

should meet regulatory requirements for capital, liquidity, funding and large exposures on a

standalone basis. Second, the permitted extent of its relationships with other parts of the

group should be no greater than regulators generally allow with third parties, and should be

conducted on an arm’s length basis.
So Barclays bank in particular is going to see little point in continuing with its current structure. The move points to a break-up here. I think there is going to be less pressure on Lloyds and HSBC as the former has no investment banking and the latter is already a diversified structure. RBS will also have a Barclays type decision, but with Government ownership and other problems I think it unlikely they can do a split of the Bank in the next few years?

Lloyds is hit with a recommendation to change its current sale plan, as at 4.6% and with poor funding it won't been seen as creating a better competitive position.

As well as the ring fence, UK Retail banks are recommended to have 10% equity Capital and also 17-20% loss-absorbing capacity. These are beyond Basel III requirements. They also seem excessive for a retail bank where losses are big but rarely enormous - without doubt this restricts bank lending. Hard to know if it is excessive, but it does seem that it would stop the need for future taxpayer bailouts.

One main issue though is that in the UK it was Northern Rock - a non-investment bank - that started this whole problem through the use of 125% mortgages. this is not an equity issue, this is a business model issue that needs to be regulated more strongly and here the Commission simply refers to the new Prudential Regulatory Authority.

Finally, the commission allows until 2019 for the full implementation of its recommendations. Plenty of time to get the Banks to raise capital and chance structures.

The report is quite sensible overall and for all the barking of the Bankers to come this regime makes more sense from a long-term point of view to UK taxpayers.

Unfortunately there is a major crisis in Europe, right now, some of our banks are in danger of not making it to 2012 let alone 2019. The FTSE is down another 2.5% as I write...


BlackRaven said...

any ideas what riskless assets are deposits going to be invested in such that they are able to generate interest to sufficiently cover the cost of administering the accounts?

Nick Drew said...

2019 !

WW2 was concluded quicker than that

CityUnslicker said...

BR - AAA gilts.....

BlackRaven said...

CU, isn't that the definition of financial repression?

andrew said...

So this report does not solve the last problem, and probably not the next one.

Expensive, complicated, probably does not work.

I think I am on the side of not changing anything as things are bad enough already.

Old BE said...

Isn't this a rather neater version of Glass-Steagall?

James Higham said...

Hard to know if it is excessive, but it does seem that it would stop the need for future taxpayer bailouts.

Hardly, when they're not based solely on economic factors.

CityUnslicker said...

BE - yes it is a modern Glass Steagall in many ways.

Andrew - hard to know what the next one is...unless it is AAA bonds all going under so that there is a funding crisis. This is not a bank regulation problem, this is a ratings agency/government problem. As mcu as I say it would not fix Northern Wreck and this is an issue; it would have stopped the need to bail-out RBS/HBOS in the same way and this is where much of our money disappeared to.

Anonymous said...

They still haven't punished any bankers for the various control frauds that they were running. Until that happens, banking reform is BS.

Anonymous said...

The real problem was that the Labour government were trying to synchronise us with the European economy, they used to boast a few years ago about moving towards continental style low interest rates.

If they hadn't done that we wouldn't have stoked up the housing market and then Northern Rock wouldn't have been offering 125% mortgages, and if they had less people would have jumped on the bandwagon.

No one in government complained about 125% mortgages a the time, rather they were quite liked that more people than ever were pumping money into the housing bubble.

It doesn't matter what regulations you have if your government is intentionally pumping up a bubble on purpose to trick the population into thinking they are wealthier than they really are.

Sebastian Weetabix said...

@ND "WW2 was concluded quicker than that"

Yes, the fighting was. But you could convincingly argue that we are still clearing up the mess today. Same for the banking system, I fear.

Puzzled of Peckham said...

"Tax payers are off the hook" or "Taxpayers will be less affected".....

Which is it? One or t'other, but can't be both!