ICB Releases Recommendations on UK Banking System Reforms

The Independent Commission on Banking (ICB) has released its recommendations aimed at "creating a more stable and competitive basis for UK banking in the longer term", as part of the international reform agenda. The ICB, led by Sir John Vickers, believes that the Basel process and EU initiatives are making important headway, but need to be "supported and enhanced by national measures". It has set a 2019 deadline for full implementation of reforms.

The Vickers' report concluded that the best policy approach is to require retail ring-fencing of UK banks, not total separation. "The objective of such a ring-fence would be to isolate those banking activities where continuous provision of service is vital to the economy and to a bank's customers. This would be in order to ensure, first, that such provision could not be threatened by activities that are incidental to it and, second, that such provision could be maintained in the event of the bank's failure without government solvency support," stated the report.

The ICB has also recommended that the retail and other activities of large UK banking groups should both have primary loss-absorbing capacity of at least 17%-20%. Equity and other capital would be part of that (or all if a bank so wished).

The Commission's view is that setting 2019 as the final deadline for full implementation provides ample time to minimise any transition risks.

Commenting on the report, the British Bankers' Association (BBA) stated: "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."

Mark Jenkinson, Capco partner, UK banking team, said: "Banks' customers will likely see a change in the services and products they receive if a ring-fence is implemented. They may find it even more difficult to find competitive rates on savings accounts, given that banks will no longer be able to invest savings through their investment arms.

"We have to remember that only universal banks will face the challenge of implementing a retail ring-fence. The silver lining for the consumer is the changes may level the playing field for new start-ups, making it easier for them to compete with the major players," he added.

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