Britain’s Independent Commission on Banking (ICB), led by Sir John Vickers, has proposed a “radical reform” of British banks, said Robert Peston on BBC.co.uk. The report is designed to make the system safer and thus limit any future taxpayer bail-out. The main proposal is that banks ‘ring-fence’ their high street from their investment banking divisions in order to stop the latter bankrupting the former with risky investments.
The retail banks will also be required to bolster their capacity to absorb losses: they will have to hold equity capital (the highest-quality kind) of at least 10% of risk-weighted assets. That’s 3% more than the internationally agreed ‘Basel III’ capital standard. The ICB’s proposals are to be fully implemented by 2019.
What the commentators said
Banks complain that it could cost around £6bn a year to implement these reforms. Let them moan, said Simon English in the Evening Standard. Last year alone the five biggest British banks received a subsidy of £46bn due to government guarantees on their debt and the lower financing costs that stem from being backed by the Treasury. In “the context of what the collapse of too-big-to-fail banks does to the economy”, the sum is “chicken feed”.
For the banks, the cost of the reforms largely represents the removal of the implicit state guarantee and the retail deposit base that kept funding costs for investment banking low, said John Kay in the FT. “The banks’ loss is directly matched by the public gain” as the potential burden on taxpayers for investment banking falls away.
But will ring fencing work in practice? As The Guardian pointed out, modern corporations possess “Transformer-like qualities – with limbs that come, go and metamorphose in the scramble to avoid obligations”. With eight years to go before the proposals have to be implemented, added English, the banks have plenty of time to subvert or dilute the reforms.