British banks need to ringfence retail divisions: ICB

11th April 2011, Comments 0 comments

British banks should ringfence their retail operations from investment bank activities, the Independent Commission on Banking said Monday in a report launched after the global financial crisis.

"The Commission is ... considering forms of retail ring-fencing under which retail banking operations would be carried out by a separate subsidiary within a wider group," the ICB said in a provisional report.

"This would require universal banks to maintain minimum capital ratios and loss-absorbing debt for their UK retail banking operations, as well as for their businesses as a whole.

"Subject to that, the banks could transfer capital between their UK retail and other banking activities."

Britain's Conservative-Liberal Democrat government established the Commission last year, shortly after the coalition rose to power in May 2010.

The ICB report is aimed at overhauling the battered banking sector in the wake of the credit crunch, in order to protect the state from bailing out more financial institutions.

"Banks ought to face market disciplines without any prospect of taxpayer support, but systemically important banks have had and still enjoyed some degree of taxpayer support. This is the 'too big to fail' problem," it said.

"Unless contained, it gives the banks concerned an unwarranted competitive advantage over other institutions, and will encourage much more risk-taking once market conditions normalise."

The ICB added that banks should raise capital ratios to "at least" 10.0 percent, significantly more than the 7.0 percent required by 2018 under new international "Basel III" rules that were agreed in September.

"We believe that you can get adequate protection of the retail side with lower cost to the system as a whole with the retail ringfence idea," ICB Chairman Sir John Vickers told BBC Radio 4.

He added that the findings were a "moderate combination of the strategies rather than maxing out on total structural separation or indeed maxing out on super-high capital requirements."

British retail banks were ravaged by the global financial crisis, resulting in the nationalisation of Northern Rock and multi-billion-pound rescues of Royal Bank of Scotland (RBS) and Lloyds Banking Group.

The government now owns 83 percent of RBS and 41 percent of rival Lloyds, while Northern Rock remains in public ownership.

© 2011 AFP

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