The Bankwatch

Tracking the consumer evolution of financial services

ICB report provides definition of ringfence and flexibility on certain commercial banking components

The most controversial aspect of the Independent Commission on Banking is the ringfence.  Now we have a definition in the final report:

The Commission’s view, in sum, is that domestic retail banking services should be inside the
ring-fence, global wholesale/investment banking should be outside, and the provision of
straightforward banking services to large domestic non-financial companies can be in or out.
The aggregate balance sheet of UK banks is currently over £6 trillion – more than four times
annual GDP. On the criteria above, between one sixth and one third of this would be within
the retail ring-fence.

The novel approach they have come up with is to provide flexibility on certain commercial banking components to be in or out and this to be made clear to customers.

Scope of ring-fence

Which activities should be required to be within the retail ring-fence? The aim of isolating
banking services whose continuous provision is imperative and for which customers have no
ready alternative implies that the taking of deposits from, and provision of overdrafts to,
ordinary individuals and small and medium-sized enterprises (SMEs) should be required to be
within the ring-fence.

The aims of insulating UK retail banking from external shocks and of diminishing problems
(including for resolvability) of financial interconnectedness imply that a wide range of
services should not be permitted in the ring-fence. Services should not be provided from
within the ring-fence if they are not integral to the provision of payments services to
customers in the European Economic Area1 (EEA) or to intermediation between savers and
borrowers within the EEA non-financial sector, or if they directly increase the exposure of the
ring-fenced bank to global financial markets, or if they would significantly complicate its
resolution or otherwise threaten its objective. So the following activities should not be carried
on inside the ring-fence: services to non-EEA customers, services (other than payments
services) resulting in exposure to financial customers, ‘trading book’ activities, services
relating to secondary markets activity (including the purchases of loans or securities), and
derivatives trading (except as necessary for the retail bank prudently to manage its own risk).
Subject to limits on wholesale funding of retail operations, other banking services – including
taking deposits from customers other than individuals and SMEs and lending to large
companies outside the financial sector – should be permitted (but not required) within the

The margin of flexibility in relation to large corporate banking is desirable. Rigidity would
increase the costs of transition from banks’ existing business models to the future regime.
And it would risk an asset/liability mismatch problem if, for example, retail deposits were
prevented from backing lending to large companies. Mismatch could give rise to economic
distortion and even to de-stabilising asset price bubbles.

Written by Colin Henderson

September 12, 2011 at 08:18

Posted in Uncategorized

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