ICB has to strike a difficult balance

Stuart Fraser
With such a broad mandate to recommend how to promote greater financial stability and competition within UK banking, the Independent Commission on Banking has a wide range of options to choose from.

And while the level of concern within UK-based banks is understandable, it is important to remember that the paper is merely an interim report, setting out the areas the commission will be looking at in the months to come.

The ICB has an important task and it is only right that it looks at every possible solution.

From the City’s perspective, the top priority must be to address the underlying problems whilst safeguarding our international competitiveness – this is a difficult balance to strike.

According to early reports, the ICB will resist pressure to include the physical splitting of UK-based banks into separate retail and investment institutions in its report.

This is good news for the banks. More importantly, it is good news for the UK economy and the consumer.

With other jurisdictions showing no appetite for such a move, splitting up the banks would have serious implications for the ability of UK-based banks to compete in the global marketplace.

And while there are compelling reasons why financial institutions continue to want to be based in London, our rivals overseas are well aware that firms do not see the UK as the welcoming business environment it once was.

The greatest danger facing the UK financial services industry is if the ICB recommends that the Government acts out of step with our international partners.

Significant steps towards greater stability have already been taken at an international level through Basel and the G20 and this is exactly the approach we should be taking.

Striking out on our own, while expedient politically, could severely compromise our international competitiveness while offering no guarantees that it will get to the root of the very problems we are trying to solve.

Stuart Fraser is Policy Chairman at the City of London Corporation

11 April 2011: The Independent Commission on Banking (ICB) releases its interim report this morning at 7am. The report will lay out all the policies the commission is considering for inclusion in its final recommendations.

12 April 2011: A second consultation period begins. The ICB will solicit written responses to its interim report and will meet again with banks, the FSA, the Bank of England, the Treasury and other interested parties.

April-June 2011: A second series of public meetings will take place, after the five held last autumn, as part of the consultation. The ICB will effectively go on a roadshow to gauge public sentiment towards its interim report.

July 2011: The ICB’s second consultation will close and the commission will spend the summer writing up its final recommendations for submission to the Cabinet Committee on Banking (CCB).

September 2011: The final report will be published with decisions on implementation turned over to the CCB. The committee’s members include chancellor George Osborne, business secretary Vince Cable and former HSBC chairman Stephen Green.


Likely to appear as an example of what the ICB is not recommending, the US Glass-Steagall Act of 1932 forced banks to choose between wholesale/investment banking activities, and retail banking. The act forced JP Morgan to sell off its investment banking operations, establishing Morgan Stanley in 1935.

Refers to the establishment of a separate legal entity within a group for tax and regulation purposes. Each subsidiary has to be capitalised separately, so banks cannot seamlessly move loss-absorbing assets between them.

Functional subsidiarisation
This would require banks to turn different business lines into separate subsidiaries and would please hard-liners like business secretary Vince Cable. It has been touted as a possible way of implementing “Glass-Steagall light” - a wholesale/retail divide under one ownership in a banking group.

Operational subsidiarisation
This could be a middle-ground compromise between banks and their critics. It would require them to hive off “essential operations” into a well-capitalised subsidiary that could withstand the failure of other parts of the bank. The idea would be to keep operations like payments systems and access to retail accounts going if a bank collapses, allowing for an orderly bankrupcty.

Living will or resolution plan
Creating a plan for an orderly wind-up in the event of a bank failure is already due to become a requirement under EU law, but the ICB could mandate a particular form of “living will” that could, for example, involve operational subsidiarisation.

Bail-in bonds
These are bonds that could force holders to take losses if a certain trigger is reached, for example if the government is forced to take over a failing bank. The regulator would then decide what haircut was to be taken by bond-holders, or could turn the bonds into equity.

Contingent convertible (co-cos)
Bonds that automatically convert into equity upon an established trigger, for example if a bank’s core tier one capital ratio drops below a certain threshold. The ICB could require banks to issue such capital to give bond-holders an incentive to monitor banks’ capital levels.

“Free if in credit” (FIIC)
This refers to the UK retail banking practice of giving free current account services to those who keep a positive balance in their account and making those with overdrafts pay large fees to cover the costs. The system has been criticised for effectively making those under financial strain pay a cross-subsidy to those with cash in their accounts.

Account market concentration
Many critics of the banking industry argue that it is too concentrated, with Lloyds, RBS, Barclays and HSBC holding 78 per cent of business current accounts and, after its government-backed merger with HBOS during the financial crisis, Lloyds alone holding 30 per cent of personal current accounts.