The Independent Commission on Banking - Final Report

Following on from its Interim Report published in April this year, the Independent Commission on Banking (Commission) published its Final Report yesterday, setting out its recommendations on reforms to promote stability and competition in UK banking. The recommendations on financial stability call for both structural reform and enhanced loss-absorbency within UK banks. Structural change in UK banking markets is recommended in order to promote competition in the sector.

Key recommendations

The Commission’s key recommendations include the following:

• The Commission has rejected the idea of total separation between retail banking and wholesale and investment banking. The Commission recommends the retail ring-fencing of UK banks, such that UK retail activities will be carried out in separate subsidiaries which are legally, economically and operationally separate from the rest of the banking group to which they belonged.
• Domestic retail banking services should be inside the ring-fence, global wholesale/investment banking should be outside, and the provision of straightforward banking services to large domestic non-financial companies can be in or out. The Commission estimates that between one sixth and one third of the £6 trillion on the balance sheets of UK banks would be within the retail ring-fence.
• On loss-absorbency, the Commission recommends that large UK retail banks should have equity capital of at least 10% of risk-weighted assets, exceeding the Basel III minimum. Retail and other activities of large UK banking groups should have primary loss-absorbing capacity of at least 17-20%. There are also recommendations relating to depositor preference, resolution buffers and leverage ratios.
• The Commission believes that the prospects for competition in UK retail banking would be improved by the creation of a new challenger by way of the Lloyds divestiture and recommends that the Government seek agreement with Lloyds to ensure that the divestiture leads to the emergence of a strong challenger bank.
• To improve switching of accounts, a free redirection service should be set up for personal and SME current accounts.
• Transparency of accounts should be improved by requirements on banks to disclose more information about prices and by making current accounts more easily comparable.
• The Commission has decided not to recommend the referral of any banking markets to the Competition Commission at present, but recommends that such a reference be considered if certain requirements are not met by 2015.

Timing

The Commission would like the Government to establish its policies in light of the Commission’s recommendations by the end of 2011 and for legislation to be passed within the current Parliament. In terms of implementation by banks, the Commission encourages banks to implement operational changes as soon as possible after legislation is passed, and suggests that:

• foregone interest should appear on bank statements no later than January 2013;
• the proposed redirection service to facilitate the switching of accounts should be fully operational by September 2013;
• given the additional capital the proposed reforms will require, full implementation of the structural and loss absorbency elements should not be required until the start of 2019 in line with the Basel III reforms.