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20th December 2011

UK government confirms retail bank capital ringfencing

The UK Treasury and the Department for Business Innovation and Skills confirmed the acceptance in full of the Independent Commission on Banking report. The two major proposals contained in the September report are for ring-fencing of retail banking capital and for Too Big To Fail UK banks to hold higher capital levels than required under Basel III. The main news from the report issued by the government was that primary and secondary legislation would be created during the current parliament, and therefore before May 2015. Implementation dates would be agreed with the banks and would be phased in some time after May 2015. The latest acceptable implementation date would be 2019.


Costs for the banks are calculated as between £3.5bn and £8bn, described as in the form of lower profits. Costs for the country in the form of lower GDP are calculated as between £0.8bn and £1.8bn. On the upside and discounting on a probability of it happening the Treasury sees a benefit of £9.5bn from the proposals. In this context the total of cash and other guarantee commitments made as a result of the last financial crisis by the UK government to the financial sector was £1.2tr (€1.4tr $1.9tr ¥145tr Y11.8tr). On top of this figure is the cost to the country in terms of reduced GDP and interest on higher government borrowing than would otherwise be the case.


The report said that it would seek to ensure that EU legislation does not hinder reforms was also made. There would appear no obvious rules in existence that would have that effect and the UK has exercised its controversial opt-out from any new EU financial sector regulation it does not like.

Angela Knight, CEO of the British Bankers Association made the following statement:

"Today's banking announcement is not the start nor the end of a process: it is the next stage of a programme of reform which our banks have well underway. The main protections are already in place to ensure no British bank will ever again be considered too big to fail. All customers should enjoy complete confidence in the security of their accounts and the taxpayer should not foot the bill for failure. The UK's banks will work with the legislators and regulators to ensure customers' confidence and trust is fully restored in the UK banking system.

"The banks have already made significant changes to how they operate. They have built up capital far beyond the current requirements to ensure they can withstand any future financial difficulties. They have already accepted the principle of ring-fencing their retail and investment banking activities. The challenge now is to ensure this can be implemented while restoring financial stability, promoting economic recovery and ensuring regulatory reform meets the needs and expectations of all participants in the banking system - principally customers."

The government document can be found at:
http://cdn.hm-treasury.gov.uk/govt_response_to_icb_191211.pdf