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Independent Banking Commission looks to ring-fence retail banking

The Independent Banking Commission is looking at “ring-fencing” retail banking and considering how that might affect banks’ ability to be wound down safely.

In a speech to the London Business School on Saturday (22nd January 2011), IBC chairman Sir John Vickers ruled out “narrow” forms of banking where banks work purely as low-risk deposit taking institutions, but said some separation may be required to allow banks to fail safely.

Retail Banking

He said: “The question I want to raise is whether and, if so, how structural reforms might relate to other reform activities, especially those to enhance banks’ capital structures and the credibility of their recovery and resolution plans to cope with crises.

“Credible resolution would seem to require some sort of separation…but perhaps the credibility of resolution plans can be ensured otherwise than by forms of separation, and the benefits would of course need to be weighed carefully against costs.”

A British Bankers’ Association spokeswoman says: “The BBA welcomes the fact that Sir John rules out recommending ’narrow banking’ and that he is not advocating the break up of banks. He is focusing on making the system safer.”

Sir Vickers said that "investment and retail banking both hold risk, but that boundaries between them are fuzzy”.

He said because retail customers have no effective alternatives to their banks for financial services, a way needs to be found for institutions to fail without causing disruption to the provision of these services.

He said: “One response to this concern would somehow to ring-fence the retail the banking activities of systemically-important institutions and require them to be capitalised on a stand-alone basis. A variant of this idea would be to require the ring-fenced retail banking activities to be relatively strongly capitalised, while adopting lighter regulatory policies toward the other activities.”

Vickers said the new rules from Basel III, which triple the amount of capital banks must hold, may not be enough for large institutions and, despite difficulties in how that extra capital is raised, he made it clear holders of bank bonds should absorb losses when institutions run into difficulty.

He said: “If one takes the view that loss-absorbing capacity of banks needs to be massively enhanced - and beyond the prospective requirements of  Basel III in the case of systemically-important institutions - there are dilemmas about how best to achieve that.

“Ultimately, financial risks have to be borne, and in a market system they should not be borne by the tax-payer providing a generous safety net.”

Further information - For more on Basel III, see this Wikipedia link.

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