Banks sue for peace with 'ring fencing' compromise
Britain's leading banks have offered a compromise to the Government-appointed Independent Commission on Banking (ICB), proposing that banks should consider “ring-fencing” core services to protect the taxpayer in the event of another financial crisis.
Banks say the ring-fencing process ? known as operational subsidiarisation ? would be the most effective way of taking risk out of the financial system. Photo: Getty Images
By Kamal Ahmed, and Harry Wilson 9:30PM BST 02 Apr 2011
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Barclays are believed to be leading negotiations and are supportive of the proposals which would mean that services such as payment systems, customers’ deposit accounts, business credit lines and the cash machine network would continue functioning even if the banks suffered another collapse.
Other leading banks are believed to have signalled a degree of support.
It was fear that the retail banking system would seize up that prompted Alistair Darling, the then Chancellor, to agree to billions of pounds of public money being used to shore up the banks in 2008.
In fresh evidence given to the Commission over the past few weeks, the banks have said the ring-fencing process – known as operational subsidiarisation – would be the most effective way of taking risk out of the financial system.
In the submissions, the banking sector argued that functional subsidiarisation – where investment and retail arms are split with separate capital structures – would be a “false friend” and should be rejected.
Operational subsidiarisation would be part of the resolution process put in place in the event of a bank coming under sustained market pressure. It was revealed last week that it is one of the options being looked at by the ICB.
In eight days’ time the ICB will produce its much anticipated interim report on UK banking.
The Sunday Telegraph can also reveal that claims by banks that the UK is becoming an increasingly uncompetitive home for the industry will be challenged by the report.
The report is expected to say that many of banks’ arguments exaggerate the threat to the financial services sector from the new rules being implemented.
The Commission’s report will give the clearest indication yet of the recommendations it is likely to present to the Chancellor, George Osborne, when it presents its final report in September.
It wants to give as much detail as possible after complaints that the banks were facing regulatory uncertainty, which was causing volatility in bank stocks.
Sir John Vickers, chairman of the Commission, and the other four commissioners will outline a series of changes to the structure of the banking industry, including proposals for the subsidiarisation.
Following the publication of the 200-page report, the Commission will call in the chief executives of all the UK’s major banks for a second round of hearings where they will be asked to give their views on the report.
A second series of public debates is also being planned that will give members of the public a chance to voice their views on how the banking system can be made safer and more competitive.
Executives at Britain’s largest lenders have been given no indication of what is in the report. However, from the questions they have received from the Commission, most expect reforms such as the forced separation of retail and investment banks to be dropped.
Treasury officials are expected to receive an advanced copy of the report this week ahead of publication to allow them to prepare the Government’s response to the paper, which represents the most radical overhaul of British banking regulation since the “Big Bang” in 1986.
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