The UK should introduce legislation that allows for a full break-up of banks and “electrifies” the ring-fencing between high street banking activities and investment banking, recommends a report.
The Parliamentary Commission on Banking Standards (PCBS), a 10-member panel of members of parliament (MPs) and peers and chaired by Conservative MP Andrew Tyrie, says in its report that the government’s planned reforms, as set out in the Independent Commission on Banking’s (ICB) recommendations – aka the Vickers report – fall short of what is needed.
“Over time, the ringfence will be tested and challenged by the banks,” states the PCBS report. “Politicians, too, could succumb to lobbying from banks and others, adding to pressure to put holes in the ringfence.
“For the ringfence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to.” The PCBS recommends that this discouragement should extend to forcing a break-up of a bank, or even the whole sector, if the Vickers reforms prove insufficient.
“That’s why we recommend electrification,” said Tyrie. “The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it.” He also recommends an annual review of how the ringfence is working, to be conducted by the new Prudential Regulation Authority (PRA) being set up inside the Bank of England (BoE) and with an independent assessment carried out at least once every four years.
Tyrie commented that the ongoing London Interbank Offered Rate (Libor) rigging scandal, which most recently saw Switzerland’s UBS pay $1.5bn in fines to US, UK and Swiss regulators, was further evidence that the banking culture needed to be reined in. The report comments: “Investigations into Libor have exposed a culture of culpable greed far removed from the interests of bank customers, corroding trust in the whole financial sector.”
The PCBS’s recommendations risk creating a rift with the Chancellor, George Osborne, who appeared before the commission last month and urged it not to press for a more radical separation of the banks.
Among its other suggestions is a way to tackle the leverage ratio used to measure the riskiness of a bank. Vickers recommended a ratio of 4%, which would restrict leveraging up of banks to 25 times, but the UK government prefers a ratio of 3%, allowing a higher leverage of 33 times. The PCBS prefers for the financial policy committee (FPC) being set up inside the BoE to be allowed to set the ratio. “The primary duty of setting a leverage ratio should fall on the FPC, not politicians,” Tyrie said.
Intellect, the trade association for the UK’s technology sector, commented that the PCBS report highlighted an acute need for regulatory authorities “to consolidate the multitude of overlapping and sometimes competing regulatory demands into a single roadmap for change”.
“Full structural separation is a task that could take between four and five years to implement and could negate much of the costly work already undertaken by banks to implement post-crisis reform,” it added.
Steve Davis, UK retail banking leader at PwC, said: “The Commission’s first report is an interesting contribution to the debate about how to implement ringfencing, however in highlighting issues such as derivative ringfencing [it] doesn’t appear to be addressing the banks’ and their customers’ urgent need for clarity, but is instead raising further questions around the White Paper.
“We remain unconvinced that, other than assisting in an orderly resolution of a failing bank, the ringfencing approach would really have any impact in preventing a bank failure, preventing a run on a bank, or preventing egregious practices that would place the bank’s future at risk. Implementing these complex proposals will take time, distract management and cost money.”
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