HM Treasury has today published a White Paper setting out how the Government intends to implement the Independent Commission on Banking’s recommendations that retail and investment banking in UK banks should be separated and the retail operation ring-fenced.
The White Paper is here. The Financial Secretary launched the White Paper with this statement to Parliament, the key passages of which are:
“Mr Speaker, the Government will ring-fence retail deposits from the risks posed by international wholesale and investment banking.
A ring-fenced bank will be economically and legally separate from the rest of its group, and run by an independent board.
The ring-fence won’t stop a bank failing, but it will insulate the deposits of families and businesses and, if a bank does fail, these essential parts of the banking system can continue without recourse to the taxpayer.
The deposits of individuals and their overdrafts, and the deposits and overdrafts of small and medium-sized businesses will, in general, be placed in ring-fenced banks.
To minimise the risks that the ring-fenced bank is exposed to, it will be prohibited from conducting the vast majority of international wholesale and investment banking.
It will not be permitted to carry out activities through branches or subsidiaries outside the EEA, nor, except in limited circumstances, with financial institutions.
Beyond this, and within certain constraints, firms may decide what to put inside the ring-fence.
Ring-fencing provides customers with flexibility, but not at the cost of financial stability.
And the Government proposes to strengthen the ICB’s recommendations by applying strict controls on the use of derivatives a ring-fenced bank uses to hedge its own balance sheet.
This will ensure that a ring-fenced bank does not take excessive risks when managing its own risks, as was the case in JP Morgan’s recent much publicised trading loss.
Mr Speaker, governance of the ring-fenced bank will be important. The Government proposes to strengthen the ICB recommendations in this area, establishing separate risk and possibly remuneration committees.
But it is important to focus these reforms where they have the biggest impact, that is, on the biggest, too-big-too-fail banks.
So the Government proposes that smaller banks, with below £25bn of mandated deposits be exempt from these requirements.
Large, systemically important banks have a competitive advantage from the perceived implicit guarantee. Or targeted reforms remove that advantage, helping smaller banks and new entrants.
Mr Speaker, one of the clearest lessons from the crisis is that investors and creditors – not taxpayers – should bear the costs of failure.
That’s why we have supported Basel III, which increases banks’ capital requirements to 7%, with a top up for systemically important banks, and we have pressed for it to be implemented across Europe.
But to protect taxpayers, this Government will go further.
The largest UK ring-fenced banks should hold an additional 3 per cent of equity on top of the Basel III minimum standards.
The Government also strongly endorses the introduction of a binding minimum leverage ratio. The White Paper supports the Basel proposal of a 3% leverage ratio for all banks, including UK ring-fenced banks, and will continue to press for the implementation of the Basel standard through EU law.
Large ring fenced banks should hold a minimum amount of loss absorbing capacity – made up of equity or debt – of 17% of risk-weighted assets.
Their overseas operations should be exempt from this requirement unless they pose a risk to financial stability.
And for smaller UK banks, as the ICB recommends, the minimum requirements should be lower.”
See also: Lord Lawson: I didn’t understand banking risk model and neither did senior management
