British banks need to ring-fence their retail operations from investment bank activities, the Independent Commission on Banking (ICB) said yesterday in a report aimed at preventing more state bailouts.
The ICB, launched last year in the wake of the global financial crisis, also proposed raising capital requirements and recommended that state-rescued Lloyds Banking Group should sell off more assets to boost competition.
“The Commission is ... considering forms of retail ring-fencing under which retail banking operations would be carried out by a separate subsidiary within a wider group,” the ICB said in a provisional report. “This would require universal banks to maintain minimum capital ratios and loss-absorbing debt for their UK retail banking operations, as well as for their businesses as a whole. Subject to that, the banks could transfer capital between their UK retail and other banking activities.”
Britain’s Conservative-Liberal Democrat government formed the commission last year, shortly after the coalition rose to power in May, sparking speculation it could force a drastic overhaul of the sector.
However, the eagerly-awaited review did not call for banks to be broken up completely, opting instead for the so-called “ring--fencing” that would not allow investment banking losses to threaten the safety of retail operations.
The ICB report is aimed at safeguarding savers’ deposits and protecting the state from bailing out more financial institutions.
“Banks ought to face market disciplines without any prospect of taxpayer support, but systemically important banks have had and still enjoyed some degree of taxpayer support. This is the ‘too big to fail’ problem,” it said.
“Unless contained, it gives the banks concerned an unwarranted competitive advantage over other institutions, and will encourage much more risk-taking once market conditions normalize,” the report said.
The ICB added that banks should raise capital ratios to “at least” 10 percent, significantly more than the 7 percent required by 2018 under new international “Basel III” rules that were agreed upon in September.
“We believe that you can get adequate protection of the retail side with lower cost to the system as a whole with the retail ring-fence idea,” ICB chairman Sir John Vickers told BBC Radio 4.
He added that the findings were a “moderate combination of the strategies, rather than maxing out on total structural separation or indeed maxing out on super-high capital requirements.”
Many of Britain’s banks were ravaged by the global financial crisis, resulting in the nationalization of Northern Rock and multibillion-pound rescues of Royal Bank of Scotland (RBS) and Lloyds Banking Group.
The taxpayer now owns 83 percent of RBS and 41 percent of rival Lloyds, while Northern Rock remains in public ownership.
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