UK banks face major overhaul by 2019
Britain’s banks are asked to ring-fence their retail and investment banking arms by 2019, but one analyst tells Channel 4 News that “all stakeholders will be hit by the costs”.
The Independent Commission on Banking (ICB) made a number of recommendations in an overhaul which aims to “make it easier and less costly to resolve banks that get into trouble” without relying on taxpayers’ help.
Sir John Vickers, who led the commission, said the ICB was pushing for a “strong and flexible” ring-fence to protect individuals’ accounts from the risks associated with so-called “casino” investments.
He said: “We must ensure the taxpayer is never again on the hook for losses made by banks. The status quo is not an option. Things have got to change.”
He added: “This is not a compromise, it’s a superior solution. It has many benefits that full separation would not. This is not a wishy-washy solution.”
The proposed reforms are expected to cost UK banks between £4bn and £7bn.
We must ensure the taxpayer is never again on the hook for losses made by banks. Things have got to change. Sir John Vickers, head of the ICB report
The ICB said banks should be encouraged to implement reforms as soon as possible but changes should be completed by the start of 2019.
It wants banks to hold an equity capital base of at least 10 percent to act as a buffer for any potential losses. It also recommended greater competition in the banking sector, calling on the government to ensure the planned sale of Lloyds Banking Group’s 632 branches leads to the emergence of a “strong challenger bank”.
The 363-page report, which was published an hour ahead of schedule after being leaked, was described by the Treasury as “impressive” and an important step towards a new banking system.
The ICB was set up last year to look at how taxpayers could be protected from future banking crises.
Read more: Faisal Islam on how the Vickers report should eventually lead to the end of 'casino gambling'.
‘Negative implications’
Credit analyst at Daiwa Capital Markets, Michael Symonds, told Channel 4 News that while banks have cautiously welcomed the recommendations, the cost implications would not be popular.
“There’s a lot of negative implications for banks in terms of how much it will cost to adjust their business model to the new rules. And all stakeholders- from customers to employees- will be affected.
The question is what happens if another banking crisis happens before 2019? Where we are now is significantly more uncertain, especially in light of the European sovereign crisis. Michael Symonds, Daiwa Capital Markets credit analyst
He said banks will also struggle to implement the changes.
“Some banks will certainly feel a bigger impact than others. Barclays and RBS will feel more of an effect, while Lloyds has come out of this relatively well,” Mr Symonds said.
“But while they make sense conceptually, the banks haven’t come far enough out of the last financial crisis to be in a postion to adjust to these new structures.
“The question is what happens if another banking crisis happens before 2019? Where we are now is significantly more uncertain, especially in light of the European sovereign crisis. We’re in a much more uncertain place than we were 12 months ago.”
Banking stocks plunged after the report was released, as investors digested the news and assessed the impact the changes could have on financial institutions.
But Mr Symonds told Channel 4 News that he doubts the extra costs would cause banks to leave the UK.
“It’s not likely to have a major effect on retail banks or push banks to look elsewhere. If anything, it’ll have an effect on international competitiveness, but that won’t affect high street banks.”
‘Careful consideration’
The British Bankers’ Association (BBA), representing the country’s banks, warned that careful consideration must be given to the reforms and their potential impact on the wider recovery.
“Any further reform measures adopted by the UK authorities need to be carefully analysed and compared with those agreed internationally,” a spokesman for the BBA said.
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The BBA warned that the ICB’s proposals will be “significantly costly and have an impact on lending”, suggesting the price of loans to individuals and businesses could rise.
But the consumer group Which? rejected those claims, saying reforms would help businesses by providing more competition in the market and enable them to switch banks more easily.
Reforms ‘won’t change banks’ attitudes’
Chef and small business owner Bea Vo told Channel 4 News that she doubts the reforms will have much of an effect as small businesses struggle to get loans in the current financial climate.
“I have been told point blank by my bank manager that there is zero interest in lending to a small business like ours. For them, to service a loan of £10- 50,000 takes the same amount of hours as a loan of say a million pounds.
They’re categorically refusing to even put through the loan applications through to credit control for approval. It’s more profitable for the big banks to deny funding to small businesses and to shore up their investment portfolios. Bea Vo, chef and owner of Bea’s of Bloomsbury
“So they’re categorically refusing to even put through the loan applications through to credit control for approval. It’s more profitable for the big banks to deny funding to small businesses and to shore up their investment portfolios.
She says banks are only interested in “making a profit, not servicing the needs of the economy” by helping smaller businesses secure loans.
