Original post (19/9/11)
The Independent Commission on Banking (ICB), led by Sir John Vickers, has just delivered its report. Central to its remit was to investigate ways of making retail banking safer and avoid another bailout by the government, as was necessary in 2007/8.
The report recommended the ‘ringfencing’ of retail banking from the more risky investment banking, often dubbed ‘casino banking’. In other words, if the investment arm of a universal bank made a loss, or even faced collapse, this would not affect the retail arm. The ringfenced operations would include banking services to households and small businesses. Wholesale and investment banking would be outside the ringfence. As far as retail banking services to big business are concerned, these could be inside the ringfence, but details would need to be worked out about precisely which banking services to big business would be inside and which would be outside the ringfence.
The ICB was keen to stress that the ringfence should be high and that the retail arm should be both operationally and legally separate from the wholesale/investment arm. The ringfenced part of the bank should have a capital adequacy ratio of up to 20% (above the Basel III recommendations), with at least 10% of liabilities in the form of equity. Capital could only be moved from the ringfenced arm to the investment arm of the bank if this did not breach the 10% ratio.
The ICB report also recommends measures to increase competition in banking, including making it easier to switch accounts, greater transparency about the terms of accounts and a referral of the banking industry for a competition investigation in 2015. The cost to the banking industry of the measures, if fully implemented, is estimated to be between £4m and £7m.
Because of the requirement in the report for banks to build up their capital and the danger that a too rapid process here would jeopardise the expansion of lending necessary to underpin the recovery, banks would be given until 2019 to complete the recommendations. Moves towards this, however, would need to start soon.
In December 2011, the government announced that it would accept most of the ICB report, including separating retail and investment banking. It would not, however, demand such stringent capital requirements as those recommended in the report.
The following articles examine the details of the proposals and their likely effectiveness. The later articles examine the government’s response.
Original articles (some with videos)
Vickers report: main points The Telegraph (12/9/11)
Bank reforms aim to get taxpayers off the hook Money Marketing, Natalie Holt, Steve Tolley (15/9/11)
Vickers report: key point Guardian, Jill Treanor (12/9/11)
Vickers report: banks get until 2019 to ringfence high street operation Guardian, Jill Treanor (12/9/11)
Bank reform: To rip asunder The Economist (17/9/11)
Banking reforms: Good fences The Economist (17/9/11)
Banks barred from putting depositors’ money at risk as Vickers’ reforms increases costs by up to £7 billion The Telegraph, Harry Wilson (12/9/11)
Vickers report: Q&A The Telegraph (12/9/11)
Vickers report: reaction The Telegraph (12/9/11)
ICB bank reforms could cost UK banks £7bn a year The Telegraph, Harry Wilson (12/9/11)
Money Insider: Will reforms really shake up the high street? Independent, Andrew Hagger (17/9/11)
Bank reforms bring quick improvements Financial Times, Elaine Moore (16/9/11)
Vickers’ critics are missing the point Financial Times, Diane Coyle and Jonathan Haskel (12/9/11)
The Business podcast: The Vickers report Guardian, Aditya Chakrabortty, Jill Treanor and Nils Pratley (13/9/11)
Vickers: Bank reforms ‘will get taxpayers off the hook’ BBC Radio 4, Today Programme, Sir John Vickers (12/9/11)
‘Enormous dilemma’ for UK’s biggest banks BBC Radio 4, Today Programme, Robert Peston (12/9/11)
ICB report and press conference
Press Conference: Vickers: Banks ‘must be ring-fenced’ BBC News (12/9/11)
Portal to Full Report and Transcript of Opening Remarks by Sir John Vickers at Press Conference. Independent Commission on Banking
Later articles and webcasts
Chancellor George Osborne to announce banking split BBC News, Nigel Cassidy (19/12/11)
Osborne to address MPs on Vickers’ report into banking BBC News (19/12/11)
Bank break-up law by 2015 BBC News. Robert Peston (18/12/11)
Osborne to Pledge U.K. Bank Legislation by 2015 Bloomberg, Gonzalo Vina and Jennifer Ryan (19/12/11)
In bank reform, ‘in full’ must mean exactly that Independent (19/12/11)
How far and how fast is key to the reforms Independent, Ben Chu (19/12/11)
George Osborne poised to bring in full banking reforms The Telegraph, Louise Armitstead and Harry Wilson (18/12/11)
EU will not impede Vickers reforms Financial Times, George Parker and Sharlene Goff (18/12/11)
- Explain the difference between a capital adequacy ratio and a liquidity ratio. Will the Vickers proposals help to increase the liquidity of the retail banking arm of universal banks?
- Does it matter if equity capital in excess of the 10% requirement for retail banking is transferred to a bank’s investment arm?
- What risks are there for a bank in retail banking?
- What are the advantages and disadvantages of bringing in the measures gradually over an 8-year period?
- Does it matter that the capital adequacy requirements are higher than under the internationally accepted standards in Basel III?
- Assume that there is another global financial crisis. Will the proposals in the report mean that the UK taxpayer will not have to provide a bailout?