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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

Vickers report tomorrow will implement ringfence of retail bank operations

Some early indications tonight about the implications of the Vickers report tomorrow.  Ring fencing is in, but with the qualification that banks can pick what is in or out, and customers can pick too.

It will be interesting to watch the unintended consequences of the higher funding charges and how banks will allocate.

UK banks eye £6bn cost of reforms

As foreshadowed, the central recommendation of the Independent Commission on Banking, chaired by Sir John Vickers, will be that banks’ core operations – including consumer deposits and small business lending – must be ringfenced from the rest of their businesses.

The cost impact of the changes will mainly be the result of higher funding charges for the banks’ operations that are left outside the more highly capitalised ringfenced entity. In the eyes of investors, operations outside the ringfence will lose the benefit both of a government guarantee and of a broad bank’s current diversification.

Written by Colin Henderson

September 11, 2011 at 23:15

Posted in Uncategorized

Perhaps a smart proposal coming from the Liikanen committee

An interesting but probably expected if I think about it development anticipated to be coming from Euro banking regulation.  When confronted with US and UK approaches why not pick both.  In this case though this might be ok in terms of being more more practical to install and actually have the required effect.

EU banks face ringfence on trading assets |

With a month to go until the Liikanen review is due to be completed, people close to the project said a clear majority was emerging in favour of a combination of the US and UK approach to structural reform of banks – taking elements of both the Volcker and Vickers rules.

And the outcome might look like …

The central tenet of the US Volcker rule is a ban on so-called proprietary trading – activity that involves betting the bank’s own money. Britain’s Vickers commission concluded that retail banking activities should be ringfenced from universal banks’ investment banking operations.

Banks will hate this, but rest assured bankers will not.  Bankers seek a return to basic banking.  Investment banking can carry on doing what it does well.  However it is not fair that investment banking have access to cheap (free) capital from retail banking that it can turn around and earn risk based fees without that capital bearing some requisite cost.

I have been involved in startups for the last 6 years and the concept of obtaining zero % financing is unthinkable.  Risk weighted cost is the order of the day, and investment bankers understand that better than anyone.  They just don’t like it but that’s no reason to not do it.

I have written before about why I strongly support the ringfence concept despite objections from some stellar industry types who basically fall into the defense of impracticality or unfairness.  Either argument fails when you consider the average savings account of your mother, who is getting practically no interest today anyway, yet bearing all the risk of investment bankers using her money.  In short there is no defense.

I like this new anticipated approach because the identification of self traded assets is relatively simple despite the inevitable arguments otherwise. 

Written by Colin Henderson

September 9, 2012 at 23:35

Posted in Uncategorized

Independent Commission on Banking report out 11th April

The Independent Commission on Banking is to release its preliminary report tomorrow (11th April) and the FT is reporting that the impact on UK banks will be to ‘ring fence’ parts of the bank, presumably Investment Banking and regular ‘utility’ banking.  I read elsewhere that the further results will be regulation on activities and on capital held against the ring fenced units.  Until tomorrow.

UK banks escape radical restructuring

The Independent Commission on Banking, chaired by Sir John Vickers, is instead expected to propose that banking groups ringfence “essential” banking services, in effect building a wall around deposit-taking, small business lending and payment systems to insulate them in the event of another financial crisis.

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Written by Colin Henderson

April 10, 2011 at 15:30

Posted in Uncategorized

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