The Independent Commission (ICB) on Banking, led by Sir John Vickers, has published its final report into UK banking proposing sweeping changes for banks that could cost them £7bn per year.
In a report of over 350 pages, the Commission calls for the opportunity to be ‘seized to establish a more secure foundation for the UK banking system’.
While falling short of demanding full separation of retail and investment banking, the report calls for banks’ core operations, their retail banking divisions including consumer deposits and small business lending, to be ring fenced from the rest of their businesses and have their own board of directors to mark out their independence.
To help limit the impact of future financial crises, banks must have a capital ‘buffer’ of at least 10% of top quality assets which goes significantly further than the 7% recommended by the International Basel Committee on banking. Beyond this banks should hold further loss absorbing capacity of between 17 and 20% of the highest quality assets.
On competition, the ICB has called for the development of strong challenger to Lloyds in high street banking who would be required to sell branches to an ‘established rival’. It also calls for steps to be taken to make it simpler for customers to switch bank accounts.
The Commission recommends that these changes are implemented by the start of 2019, a longer timeframe than many expected. While all political parties have welcomed the report, however, the timetable for implementation is set to be a potential source of tension for the Coalition.
The Chancellor, George Osborne MP, has said the report is ‘very good’ and that he will stick to the timetable recommended with legislation in this Parliament. The Business Secretary, Vince Cable MP, meanwhile has demanded a swifter response to the report and that reforms are included in the current Financial Services Bill.
Emerging opinion beyond the Westminster village seems divided over the effect of the proposed ring fencing with some envisaging that it will choke off recovery and others that it will have minimal impact. Business has already, however, reacted to the capital requirements in the report with the CBI warning that the proposals would leave British Banks at a disadvantage with their international rivals. What is clear is that with a long implementation time frame ahead and in the current economic climate the debate over Vickers report is likely to run and run.