Banking reform

The Government has published its white paper ‘Banking reform: delivering stability and supporting a sustainable economy’, setting out the Government’s proposals for implementing the recommendations of the Independent Commission on Banking (ICB) (Vickers reforms), to fundamentally reform the structure of banking in the UK. Comments on the white paper are requested by 6 September 2012.

It confirms that retail banking operations will be ring-fenced from riskier operations such as investment banking.

Financial Secretary to the Treasury, Mark Hoban, addressing the House of Commons said:

‘The Government will ring-fence retail deposits from the risks posed by international wholesale and investment banking. A ring-fenced bank will be economically and legally separate from the rest of its group, and run by an independent board.’

However, there have been some concessions made after lobbying by the banks. Ring-fenced banks will be able to offer simple hedging products, subject to the necessary safeguards. Also, smaller banks, with a value of less than £25m, will not be required to set up a ring-fence despite the ICB proposals.

The Government has also chosen not to apply a higher leverage ratio to large ring-fenced banks. The ICB had called for the biggest banks to have a ratio of 4% in an attempt to limit the risks they take. However, the Government does not see a case for increasing beyond the Basel III level, currently proposed at 3 %.

Sir John Vickers, chair of the ICB, speaking to the Guardian said the government should have gone further in adopting his committee's proposals:

‘The white paper proposals are far-reaching, but on some points – such as limits on the leverage of big banks - we believe they should go further. We welcome that the ICB proposals have been accepted in large part, but urge the government to resist pressure to weaken their effectiveness.’

The Government will introduce legislation with the aim of completing all primary and secondary legislation by the end of this Parliament in May 2015. Banks must comply with all of the measures proposed here by 2019, as the ICB recommended.

The ICB was set up on 16 June 2010, at the onset of the banking crisis, to be chaired by Sir John Vickers. The Commission was asked to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition. The ICB published its report on 12 September 2011.

The chancellor is expected to discuss the proposed reforms in his annual Mansion House speech on this Thursday evening.