The long awaited report from the Independent Commission on Banking (IBC) has been released today, showing that a major shakeup of the banking sector is badly needed.
The IBC is calling for what experts claim to be some of the ìmost radical reforms of British banks in a generation.î
These types of reforms have not been tried anywhere else in the world and will take time to implement. They are designed to protect the tax-payer from failing banks by separating the retail divisions from riskier investment sectors should one, or the other, suffer from further economic turbulence.
This means that all of Britainís leading banks would have a retail banking operation which would have a new ring fence.
The report suggests that the separate entities of the bank should have separate legal entities and independent boards.
The reforms have been implemented in order to reduce the cost of bailing out banks so that the financial burden falls on the investors and lenders, not the taxpayer. It is hoped that the system will safeguard against another future economic meltdown such as that of 2008.
The new system is likely to affect different institutions in different ways though.
The investment and banking activities of Barclays and Royal Bank of Scotland would not be allowed inside the ring fence for example. In contrast, Lloyds and Santander would be able to put the majority of what they do inside the ring fence.
The Federation of Small Businesses is concerned that this could allow banks to increase the cost of borrowing, arguing that the guarantee would be removed from the ìinvestment banking arm ìto the ìretail armî.
However, the recommendations made by the IBC seem to have been initially welcomed by the banking sector. The Building Society Association Director General, Adrian Coles, said; ìThe ring-fence proposals appear both sensible and proportionate.î
The IBC has called for the changes to come into affect from 2019.
The British Bankers’ Association commented on the IBC report, “UK banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by UK, EU and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained.
ìThe ICB’s recommendations cover the same important issues. Any further reform measures adopted by the UK authorities need to be carefully analysed and compared with those agreed internationally. It is vital that the full impact any further reforms will have on the economy, the recovery and banks’ ability to support their customers in the UK is understood.”