Fixing the posts for the ring fence
written by Angela Knight on 16/12/2011
On Monday the Chancellor of the Exchequer will set out the way in which the Government plans to take forward the recommendations of the Independent Commission on Banking (ICB) which reported in September (and which I blogged about most recently here).
This is a piece of work which has dominated the debate about the future of our banking system this year. It sets out ways to strengthen the banking system to ensure the UK maintains its position as the world’s financial centre and never again has to call on the taxpayer for support. We provided detailed comment throughout this process, as did the UK’s major banks.
We know the Government has committed in principle to implementing the proposals. And we know the big banks are preparing for the reforms – principally the creation of a ring-fence around their high street operations.
It is probably worth repeating again that the broad objective for the ring-fence is making sure that the retail and busines lending of banks is protected. This aligns with the broader objectives of the international reform programme being pursued by the international standard setters: the G20 (to which all the major countries belong); the Financial Stability Board (set up by the G20 to put some substance behind the global stability agenda); the Basel Committee on Banking Supervision (which sets out the rules on the capital and liquidity that the banks have to hold); and the European Union (which puts the decisions into directives and rules that apply across the 27 countries).
The big issue for the UK - and where the need for consultation on the ICB comes in - is the need to define where the ring-fence will stand: which of a bank's activities can only be undertaken from inside the ring fence (or mandated, in ICB parlance); which other activities are permitted to be either inside or outside the ring fence (ancillary activities, allowed but not mandated); and which are prohibited from being within the ring fence. The ICB presented a theoretical blueprint which now needs to be turned into a plan capable of practical implementation and without unintended consequences.
We need to wait and see what the Chancellor says on Monday, but it is expected that his statement will start a formal process rather than conclude one. In other words, after the Chancellor has spoken we will see some form of a consultation paper on both the ICB peoposals and the Treasury view of them, and that the outcome of this process will be a white paper in 2012. Both legislation and regulation will be required to bring final decisions into being. And as so much is also linked to Basel III (the international stability changes for the world's banks), then it is not surprising that the ICB has recommended that the backstop timetable should be the same at 2019.
Yes, 2019 is a long time ahead, but this is a backstop date - the end and not the start of the changes. And huge progress has already made towards strengthening the financial system. As the European Banking Authority stress tests showed last week, the UK banks are in a stronger position than any of their international competitors when it comes to capital: it is the banks in some of the other EU countries which need to raise more. The UK moved first and furthest in making these changes, starting three years ago to increase substantially the banks’ capital levels . In so doing, they provided the markets with the assurance they needed and provided assurance to customers as well, as has been recognised by Sir Mervyn King when speaking recently at his press conference on the Bank of England’s Financial Stability Report.
And much of the ICB agenda is already underway by other means, such as recovery and resolution plans (RRPs) to ensure that if a bank hits a problem in future, it has a programme in place to deal with it without causing problems for customers. Deposits are now protected fully up to £85K - and without the taxpayers being involved even if the bank ultimately fails. Both the UK authorities and the banks believe that no bank is now too big to fail. Meanwhile the bank levy means that a permanent £2.5bn in tax is paid by the industry.
The ICB also calls for a more competitive market. So account switching is already being speeded up and the sale of more than 600 Lloyds branches is progressing smoothly, as we learned this week.
So where does it all go next?
The banks are committed to working with the Government on these next stages of regulatory reform and we hope that as part of his announcements the Chancellor also commits to publishing what these changes truly mean - in cost, in economic impacts and in changes for business, as well as for the industry. This is a project in which we really are all in it together. An effective banking industry is essential for a modern economy and changes to a banking indutsry therefore also affect the economy. Working out how to implement what is decided must also take very careful account of the customer. Put the ring fence in the wrong place and it is the customer who feels it and the customer who will bear the consequences. This is the time to put politics to one side and let practicalities come to the fore.
Other things happen on Monday: we also hear from the joint committee (of MPs and Lords) charged with scrutinising the draft Financial Services Bill. Their report will shed some more light on the legislative bedrock of our new regulatory architecture: the Financial Policy Committee within the Bank of England, with its remit for macroprudential oversight and financial stability; the Prudential Regulation Authority; and the Financial Conduct Authority. The MPs and Lords can be expected to set out their views on the democratic accountability of the new arrangements. And I am sure that they will give their comments on the ICB as well.
So in true Parliamentary timetable tradition, it's a case of: shove out the answers, reports, consultations and discussions and then go on holiday - leaving the rest of us with more to chew on than just a tough turkey.