The final report of the UK Independent
Commission on Banking (ICB) has been published and as widely
forecast, contains no last minute shocks.
According to the ICB, the cost of the reforms
to the industry will be in the region of £4bn ($6.4bn) to
£7bn.
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The 358 page report proposes:
- A ring-fence” between retail and investment
banking. UK retail banks would be required to hold 10 per cent of
equity capital to their risk-weighted assets. Flexibility on how
the ring-fencing will work means billions of pounds of corporate
deposits will not be caught by the firewall – good news for HSBC.
The report is less favourable for Barclays and Royal Bank of
Scotland (RBS), given the size of their investment banking
units; - A requirement for the largest banks to hold loss-absorbing
capital of between 17% and 20%; - Implementation of the recommendations to be delayed until
2019; - No requirement on the UK’s largest retail bank, Lloyds Banking
Group, to sell more than the already agreed tranche of 632
branches; - No competition enquiry into retail banking until 2015, and
- A boost to account switching for retail and SEM banking.
According to ICB chairman, John Vickers, the report, if
implemented in full, will insulate UK banks from global financial
shocks, make it easier to wind up failed banks and protect the
taxpayer from unaffordable government guarantees.
Reaction mixed:
While industry reaction was mixed, overall the report could have
been far worse for the industry and represents a victory for the
banking sector’s extensive lobbying campaign since the ICB was set
up.
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By GlobalDataMichael McKee, head of financial services
regulation at DLA Piper, said:
“Most interesting is the detail of how the
ring fence will operate. It will focus on deposits of
individuals and small businesses – but this is likely to catch a
lot of private banking business too.
“The ring fence looks like it will be quite a
“hard” ring fence – a retail bank will have to deal at arms length
with other parts of the group and apply large exposure rules.
“Moreover the ICB sticks to its guns
about a minimum level of 10% capital for retail banks and also
wants a lower leverage limit than international proposals.
Overall, therefore, the ICB has withstood political pressure from
the Liberals but has taken a tough line on the content of its ring
fence.”
Ian Gordon, analyst at stockbrokers Evolution, was less
complimentary.
“The ICB report is unwelcome and unhelpful, but it could easily
have been a whole lot worse,” said Gordon.
The reforms will certainly delay any prospect of the UK taxpayer
– currently nursing paper losses of around £40bn on
its total £70bn investment – exiting the two bailed
out lenders Lloyds and RBS with shareholdings of 41% and 83%
respectively.
Boost for account switching
On account switching the ICB rejects the notion of account
number portability. According to the ICB, current account
statements should display the amount of interest foregone as a
result of the majority of current account paying 0% interest.
The report found that mortgages have the highest switching
rates, peaking at just over 10% in the middle of the last decade.
Personal current accounts and SME banking had the lowest switching
rates with the former amounting to only 3.8% of accounts in
2010.
The report said that three-quarters of consumers have never
considered switching their current account.
