View the article online at http://citywire.co.uk/money/article/a647230
MPs: protect bank deposits with 'electrified' ring-fence
The Banking Commission has told the government it must toughen up the banking rules around protection of consumer deposits.
The government’s Banking Commission has called for the ‘electrification’ of the proposed ring-fence around consumer deposits in banks following more ‘collusion and corruption’ in the banking sector.
A report by the Parliamentary Commission on Banking Standards, chaired by Andrew Tyrie, said ring-fencing consumer deposits from banks’ riskier business is welcomed, but the government must go further to protect consumers deposits and protect taxpayers from the risk of another bailout.
Tyrie said an inquiry into banking standards was commissioned following revelations about the Libor scandal, but ‘the latest revelations of collusion, corruption, and market-rigging beggar belief’.
Focusing on the ring-fencing proposals in its report, Tyrie said it could help banks to fail in a safer way, but he had reservations about the strength of the proposals.
‘The proposals, as they stand, fall well short of what is required. Over time, the ring-fence will be tested and challenged by the banks. Politicians, too, could succumb to lobbying from banks and others, adding to pressure to put holes in the ring-fence,’ he 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.’
The Banking Commission does not just want to give the regulator more power over banks’ business structures but also ensure banks’ board members take responsibility for keeping consumer deposits safe.
The report said: ‘The commission recommends that the government insert within the Financial Services and Markets Act a legal duty on boards of directors to preserve the integrity of the ring-fence.’
However, the commission warned that a ring-fence would not negate the need for a bail-out regime in the UK if another bank should collapse.
Tyrie said: ‘A ring-fence alone cannot solve the "too big to fail" problem… The current proposals need strengthening in order to assure parliament, and the markets, that we are not creating a paper tiger. Rules with real teeth are required.’
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