Partner Article

Ring-fencing needs electrifying

The ring-fencing of banks must be electrified, say the Parliamentary Commission on Banking Standards.

In a report, the Chairman of the Commission, Andrew Tyrie MP said the revelations of collusion, corruption and market-rigging “beggar belief.”

He suggested that government proposals in the draft Financial Services Bill fall short of what is required, and that banks will “test” the fence, while politicians may succumb to lobbying to put holes in the fence.

The report does not contradict the points of the Vickers report, but calls for full separation of banks who do not comply.

Mr Tyrie said: “For the ring-fence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to.

“That’s why we recommend electrification. The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it.

“Furthermore, we need periodic reviews of the sector to reassure us that the ring-fence as a whole is working. Tougher measures may yet be required.

“The Commission will take further evidence on whether full separation of proprietary trading - something akin to a Volcker Rule - may be appropriate.

“Next year the Commission will also be looking at, and reporting on, what contribution changes in areas such as competition, corporate governance, supervision and regulation and the civil and criminal law could make to enhancing standards and culture in banking.”

Matthew Fell, CBI Director for Competitive Markets, commented: “The right way forward on bank structures is to implement the ring-fencing proposals as set out in the Banking Reform Bill, which strike a balance between increasing financial stability and giving growing companies access to the services they need under a universal banking model.

“It is important that banks implement the ring-fence fully. Whilst the threat of full separation might help to concentrate minds, such a move would be detrimental to businesses, preventing them from accessing the full range of services they need from a single provider.

“Having addressed the important question of structure, the Commission should now shift its focus to driving a culture change where the customer is front and centre of everything that banks do, where increasing competition should play a major part.”

This was posted in Bdaily's Members' News section by Tom Keighley .