Vickers could defuse bank policy row

TENSIONS between Conservatives and Liberal Democrats over implementing the Vickers Commission’s ring-fence proposals could be defused by leaving much of the detail to regulators.

Chancellor George Osborne vowed yesterday to give clarity on exactly how he will implement the Vickers Commission’s proposal for a ring-fence around retail banks by the end of the year. But he added: “The central benefit of a ringfence is not to end large universal banking groups but to make them more easily resolvable in a crisis.”

That could put him on a collision course with business secretary Vince Cable, who has called investment banking “the equivalent of playing the roulette wheel” and argued for an end to universal banks that conduct both retail and investment banking.

However, the Independent Commission on Banking (ICB) report suggests that much of the detail of the structural changes could instead be thrashed out between banks and their regulators, allowing the coalition to duck a political row.

The ICB specified that assets and deposits should be carved up into three categories on the basis of “a set of ring-fence principles” that will determine which activities take place inside or outside the ring-fence.

But, it added: “These principles are not in a format which would be appropriate for legislation or regulatory rules.”

That means that the legislation to bring about the changes can include only a broad ring-fencing requirement, with much left to regulators’ and banks’ discretion.

In particular, the ICB recommends that banks decide whether lending to corporates takes place inside or outside the ring-fence.

One banking law expert told City A.M. that the leeway means that working out how the ring-fence will work for each bank could simply become part of the ongoing process of drawing up resolution regimes for banks. If so, it will reduce their ability to stoke political conflict within the coalition.

The ICB report also contained recommendations on the timeline for implementation. Vickers suggested that legislation be passed soon, with Osborne promising to pass it in the next year. But banks will have until 2019 to fully implement the changes.

TIME LINE | THE INDEPENDENT COMMISSION ON BANKING

16 JUNE 2010
Chancellor George Osborne appoints the Independent Commission on Banking, chaired by Sir John Vickers, to identify reforms to improve competition and stability.

24 SEPTEMBER 2010
The Commission publishes its first issues paper setting out options for reform. It proposes for the first time separating retail and investment banks; contingent capital; living wills and resolution plans among other possible structural reforms.

26 JANUARY 2011
Commission publishes the more than 150 responses from the issues paper, which show support for living wills and opposition to the concept of creating narrow banks. Most respondents say Basel III is not stringent enough, but support the idea of “bail-in” capital. Opinion is divided over ring-fencing.

11 APRIL 2011
Commission publishes its interim report firming its views on reforms. The report backs the ring-fencing of UK banks through a firewall, but stops short of calling for complete separation. It adds that the sale of 632 Lloyds branches should be “substantially enhanced” to improve competition.

13 JULY 2011
Commission publishes the 170 responses to its interim report, showing its plan for a ring-fence is still receiving a mixed response.

12 SEPTEMBER 2011
The final report is published, recommending ring-fencing of operations and higher capital requirements on retail banks among others.

1 JANUARY 2019
Commission gives banks eight years to erect firewalls and raise additional capital.