Monday, September 12, 2011
The Independent Commission on Banking
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

There is a lot in the Independent Commission on Banking's final report, including a recommendation that UK retail banks hold equity capital equivalent to 10% of risk-weighted assets, and that large banking groups have primary loss-absorbing capacity, which is explained in detail in the report, of 17% to 20%.

Ring-fencing is, however, at the heart of the report, as expected: "The Commission’s view is that the board of the UK retail subsidiary should normally have a majority of independent directors, one of whom is the chair. For the sake of transparency, the subsidiary should make disclosures and reports as if it were an independently listed company. Though corporate culture cannot directly be regulated, the structural and governance arrangements proposed here should consolidate the foundations for long-term customer-oriented UK retail banking.

"Together these measures would create a strong fence. There would however be important differences relative to complete separation. First, subject to the standalone capital and liquidity requirements, benefits from the diversification of earnings would be retained for shareholders and (group level) creditors. Among other things, capital could be injected into the UK retail subsidiary by the rest of the group if it needed support. Second, agency arrangements within the group would allow ‘one-stop’ relationships for customers wanting both retail and investment banking services. Third, expertise and information could be shared across subsidiaries, which would retain any economies of scope in this area. Fourth, some operational infrastructure and branding could continue to be shared.

"For these reasons, ring-fencing should have significantly lower economic costs than full separation."

The ICB report, which is here, says implementation of the reforms should be completed at the latest by 2015.