The Independent Commission on Banking has recommended that UK banks should ring fence their retail banking operations to protect customers and the taxpayer from riskier investment banking divisions.
The Commission, led by Sir John Vickers, has made the recommendation because it would “make it easier and less costly to resolve banks that get into trouble”.
Changes should be implemented by the start of 2019, according to the Commission.
If fully adopted in their current format, the recommendations mean that UK banks will need a separate legal entity for their retail and investment banking operations in the future, as well as independent boards.
UK banks will also need to hold more capital in case of financial difficulties. The Independent Commission on Banking has recommended a capital buffer of at least 10% of certain assets, which is a tougher requirement than the 7% recommended by the international Basel Committee on Banking Supervision.
These proposals could potentially make the UK a less attractive place for banks to do business. The Government will need to balance the risks and costs associated with implementing the proposals with the potential risks and costs of allowing current banking structures to continue.
It will be reasonably costly for banks to implement these recommendations, with initial estimates of £5-7bn of costs involved. As a result, banking shares fell on the publication of the report this morning.
From a consumer perspective, these proposals are important because they are likely to result in higher explicit banking costs in the future.
The report proposes that banking customers should have an easier time moving between banks, with a free current account redirection service in place by 2013. There is also likely to be greater competition and choice, with the Lloyds branch sale seen as an opportunity for a strong competitor to enter the market.
Whilst the banking sector needs to become safer if we are to avoid another repeat of the taxpayer funded bailouts caused by the last global financial crisis, it is important to remember who pays the cost of regulation.
In addition to higher costs for banking customers, the taxpayer remains a majority owner in RBS (with a 83% stake) and owns 41% of Lloyds. If too stringent regulation is brought into force, this could have the unfortunate consequence of reducing the value of banking shares to such an extent that we all lose out.
The right balance will be difficult to strike as these recommendations are considered and implemented.
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