12.9.2011
By Simon Miller
The Independent Commission on Banking (ICB) ruled out a complete split in universal banking in its report but the expected ring-fencing of retail activities has been recommended.
The 363-paged ICB report, released this morning, rejected the complete separation of banks as it could lead to higher economic costs and it was not certain whether a complete split would make for greater stability.
Instead retail arms of banks will be ringfenced with up to a third of UK banks' balance sheets estimated to be inside the ring fence with global wholesale banking on the outside.
The ICB said there were three reasons why structural seperation should be introduced.
Firstly, the commission said that it should make it easier and less costly to resolve banks that get into trouble. "By ‘resolution’ is meant an orderly process to determine which activities of a failing bank are to be continued and how", the report said.
Secondly it should help insulate retail banking from external financial
shocks, including by diminishing problems arising from global interconnectedness.
"This is of particular significance for the UK in view of the large and complex international exposures that UK banks now have," said the commission.
"Much of the massive run-up in bank leverage before the crisis was in
relation to wholesale/investment banking activities. Separation would guard against the risk that these activities might de-stabilise the supply of vital retail banking services," it added.
Thirdly, the commission believed that structural separation would help sustain the UK’s position as a pre-eminent international financial centre while UK banking is made more resilient.
It said: "The improved stability that structural reform would bring to the UK economy would be positive for investment both in financial services and the wider economy. The proposed form of separation also gives scope for UK retail banking to have safer capital standards than internationally agreed
minima, while UK-based wholesale/investment banking operations (so long as they have credible resolution plans, including adequate loss-absorbing debt) are regulated according to international standards."
The commission added: "Without separation there would be a dilemma between resilient UK retail banking and internationally competitive wholesale and investment banking."
The report admitted that the reforms would cost the banks with direct operational costs possibly increasing and admitted that the economy
would suffer if separation prevented retail deposits from financing household mortgages and some business investment.
It also acknowledged that although global wholesale and investment banking poses risks to UK retail banking, "there are times when it
might help cushion risks arising within UK retail banking" and added that the cost of capital and funding for banks might increase.
Overall, the ICB estimates that the costs to banks will be between £4bn and £7bn a year and banks will get until 2019 to fully implement the plans and minimise any transaction risks.
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