UK commission suggests 'retail ring-fencing' in banking sector
By Robert Barr |
April 12, 2011, Tuesday
|
Print Edition
Print Edition
A British commission recommended yesterday that banks should be reorganized so that firewalls protect retail operations from investment banking, an attempt to shield taxpayers from the sector's risk-taking without forcing the banks to split up.
The preliminary report from the Independent Commission on Banking aims to avoid another catastrophic failure of a financial system dominated by a few large banks too big to be allowed to fail.
The commission, which will make final recommendations in September, said it was considering "forms of retail ring-fencing under which retail banking operations would be carried out by a separate subsidiary within a wider group," which would still allow some capital transfers within the organization.
The report also called for part-nationalized Lloyds Banking Group PLC, which has a dominant position in retail banking with more than 30 percent of UK current accounts, to dispose of more branches beyond the 600 required by the European Commission.
Sir John Vickers, the commission's chairman, told the British Broadcasting Corp that the hastily arranged takeover which created Lloyds Banking Group "was certainly not good for competition and it turned out to be bad for financial stability as well."
Lloyds, 41 percent owned by taxpayers, only said it was "assessing the full implications of the report."
The commission called for banks to hold more capital than the 7 percent ratio of equity to risk-weighted assets set in the Basel III agreement.
The commission said a forced break-up of banks would be costly and some of the benefits of universal banking could be lost.
"We believe that you can get adequate protection of the retail side with lower cost to the system as a whole with the retail ring fence idea," Vickers said.
The report said retail customers have no real alternatives to their banks for essential financial services, "hence the imperative to avert disruption to the system for their continuous provision."
"Taking the perspective of the average consumer, the interim report would appear to be somewhat disappointing," said Keith Bowman, analyst at Hargreaves Lansdown Stockbrokers.
"Rising financial capital cushions are likely to be paid for by increased banking charges, whilst the rise of an army of new alternative banks still looks to be a lifetime away," Bowman said.
The preliminary report from the Independent Commission on Banking aims to avoid another catastrophic failure of a financial system dominated by a few large banks too big to be allowed to fail.
The commission, which will make final recommendations in September, said it was considering "forms of retail ring-fencing under which retail banking operations would be carried out by a separate subsidiary within a wider group," which would still allow some capital transfers within the organization.
The report also called for part-nationalized Lloyds Banking Group PLC, which has a dominant position in retail banking with more than 30 percent of UK current accounts, to dispose of more branches beyond the 600 required by the European Commission.
Sir John Vickers, the commission's chairman, told the British Broadcasting Corp that the hastily arranged takeover which created Lloyds Banking Group "was certainly not good for competition and it turned out to be bad for financial stability as well."
Lloyds, 41 percent owned by taxpayers, only said it was "assessing the full implications of the report."
The commission called for banks to hold more capital than the 7 percent ratio of equity to risk-weighted assets set in the Basel III agreement.
The commission said a forced break-up of banks would be costly and some of the benefits of universal banking could be lost.
"We believe that you can get adequate protection of the retail side with lower cost to the system as a whole with the retail ring fence idea," Vickers said.
The report said retail customers have no real alternatives to their banks for essential financial services, "hence the imperative to avert disruption to the system for their continuous provision."
"Taking the perspective of the average consumer, the interim report would appear to be somewhat disappointing," said Keith Bowman, analyst at Hargreaves Lansdown Stockbrokers.
"Rising financial capital cushions are likely to be paid for by increased banking charges, whilst the rise of an army of new alternative banks still looks to be a lifetime away," Bowman said.
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