British banks 'need to ringfence retail operations'

11th April 2011, Comments 0 comments

Britain's banks need to ringfence their retail operations from investment bank activities, the Independent Commission on Banking urged Monday in a report aimed at preventing more state bailouts.

The ICB, launched last year after the global financial crisis, also proposed raising capital ratios and recommended that state-rescued Lloyds Banking Group sell more assets to boost competition.

"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."

The Commission, which will publish its final report in September, also called for improved measures to help consumers switch current accounts.

Britain's Conservative-Liberal Democrat government formed the Commission last year, sparking speculation it could force a drastic overhaul.

However, the eagerly-awaited review did not call for banks to be broken up, opting instead for "ring-fencing" that would not allow investment banking losses to threaten retail operations.

Deputy Prime Minister Nick Clegg praised the ICB for encouraging competition and safety.

"It is not right to have very high-risk and very low-risk banking activities so intertwined so that when something goes wrong it is the taxpayer that picks up the bill," said Clegg, who is leader of the Liberal Democrats.

"All that is absolutely crucial, is that the banking system must be made not only competitive but also safe."

The report is aimed at safeguarding savers' deposits and protecting the state from bailing out more financial institutions.

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.

Britain's 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 ICB also criticised the previous Labour government for allowing Lloyds to buy struggling rival HBOS at the height of the financial crisis.

Lloyds was ravaged by its 2008 takeover of Halifax Bank of Scotland (HBOS), which was saddled with toxic or high-risk investments in the property sector.

"At the height of the crisis in 2008, Lloyds was allowed, contrary to the normal takeover rules, to acquire HBOS," added Vickers.

"This was certainly not good for competition and it turned out to be bad for financial stability as well, because the HBOS problems infected the much larger Lloyds group."

The report added that Lloyds needed to sell off more assets, on top of the 600 branches that it has been forced to sell by the European Commission.

In reaction, Lloyds said it would update the market once it has reviewed the ICB report in detail. Other banks have yet to comment.

© 2011 AFP

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