Finally today after almost a year of anticipation the Independent Banking Commission has released its report, a mere 363 pages (rather too much to digest with my cereal this morning). Pulling no punches it recommends the full ring-fence option for UK retail banks:
To achieve the purposes of ring-fencing, retail banking activities should have economicSo Barclays bank in particular is going to see little point in continuing with its current structure. The move points to a break-up here. I think there is going to be less pressure on Lloyds and HSBC as the former has no investment banking and the latter is already a diversified structure. RBS will also have a Barclays type decision, but with Government ownership and other problems I think it unlikely they can do a split of the Bank in the next few years?
independence. This requires, first, that the UK retail subsidiary of a wider banking group
should meet regulatory requirements for capital, liquidity, funding and large exposures on a
standalone basis. Second, the permitted extent of its relationships with other parts of the
group should be no greater than regulators generally allow with third parties, and should be
conducted on an arm’s length basis.
Lloyds is hit with a recommendation to change its current sale plan, as at 4.6% and with poor funding it won't been seen as creating a better competitive position.
As well as the ring fence, UK Retail banks are recommended to have 10% equity Capital and also 17-20% loss-absorbing capacity. These are beyond Basel III requirements. They also seem excessive for a retail bank where losses are big but rarely enormous - without doubt this restricts bank lending. Hard to know if it is excessive, but it does seem that it would stop the need for future taxpayer bailouts.
One main issue though is that in the UK it was Northern Rock - a non-investment bank - that started this whole problem through the use of 125% mortgages. this is not an equity issue, this is a business model issue that needs to be regulated more strongly and here the Commission simply refers to the new Prudential Regulatory Authority.
Finally, the commission allows until 2019 for the full implementation of its recommendations. Plenty of time to get the Banks to raise capital and chance structures.
The report is quite sensible overall and for all the barking of the Bankers to come this regime makes more sense from a long-term point of view to UK taxpayers.
Unfortunately there is a major crisis in Europe, right now, some of our banks are in danger of not making it to 2012 let alone 2019. The FTSE is down another 2.5% as I write...