In its final report, the Independent Commission on Banking (ICB) recommends the separation of retail banking and wholesale/investment banking on the basis that structural separation should make it easier and less costly to resolve banks that get into trouble.
The report argues that one of the key benefits of separation is that creditors would be more likely to bear losses of failing retail banks and failing wholesale/investment banks, instead of the taxpayer.
Separation has costs however, and the ICB warns that banks’ direct operational costs might increase and the economy would suffer if separation prevented retail deposits from financing household mortgages and some business investment.
In addition, customers needing both retail and investment banking services might struggle with the new arrangements and while 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.
The Commission also recommends that large UK retail banks should have equity capital of at least 10% of risk-weighted assets, with the proportion exceeding the Basel III minimum.
According to the ICB, the aggregate balance sheet of UK banks is currently over £6 trillion, more than four times annual GDP, and on the Commission’s criteria, between one sixth and one third the total would be within the retail ring-fence.
Chancellor of the Exchequer, George Osborne, is known to be in support of ring-fencing but a timescale for implementation has yet to be announced, with latest estimates looking towards 2016.
The British Bankers’ Association has responded to the report saying:
“UK banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by UK, EU and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained.
“The ICB’s recommendations cover the same important issues. Any further reform measures adopted by the UK authorities need to be carefully analysed and compared with those agreed internationally.
“It is vital that the full impact any further reforms will have on the economy, the recovery and banks’ ability to support their customers in the UK is understood.”