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MPs call for banking ring-fence to be 'electrified'

by William Robins on Dec 21, 2012 at 08:00

MPs call for banking ring-fence to be 'electrified'

MPs have called for ‘electrification’ of ring fences that will split up banks under new laws, to prevent future abuses.

The government-commissioned Parliamentary Commission on Banking Standards, led by MP Andrew Tyrie (pictured), has published its first report containing its review of the draft Financial Services (Banking Reform) Bill.

The bill will enact proposals from the Independent Commission on Banking, central to which was ring-fencing of banks' investment activities from personal and business lending.

This proposal has been enacted by government so that by 2019 banks will operate a dual structure.

However, in its review of the proposals the commission warned banks would find a way around the ring-fence unless incentivised not to.

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.’

Among the commission’s recommendations were:

  • no actual or perceived government guarantee of ring-fenced banks;
  • powers to incentivise banks to comply with both the letter and spirit of  ring-fence rules;
  • reserve powers to implement full separation to be included in forthcoming legislation;
  • enhanced parliamentary scrutiny of proposed use of delegated powers which could see ring fences shift over time;
  • handing the regulator the duty of ensuring operational independence for the ring-fenced bank in respect of governance, risk management, treasury management, human resourcing, capital and liquidity;
  • controls over selling derivatives ‘within the ring-fence’.

The commission is to take evidence on whether the UK could implement a version of the US Volcker rule which prevents deposit taking banks from engaging in proprietary trading, acquiring an interest in a hedge fund or private equity fund or sponsoring such funds.

6 comments so far. Why not have your say?

Yvonne Goodwin

Dec 21, 2012 at 08:40

And would ringfencing have stopped the UK banking crisis - Northern Rock, Halifax etc? Read this article from Miles Saltiel for some context. http://www.adamsmith.org/sites/default/files/resources/Botched_Opportunity_ASI_2011.pdf

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Frank Meaden

Dec 21, 2012 at 08:59

In my (normally derided) view, the banks need to be split up. Retail on one side, low risk with government guarantees (already in place anyway) and then investment banking with all the associated risks on the other.

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Colin Pal

Dec 21, 2012 at 09:13

With the current standard of Regulator in charge of the (electrification) switch, heaven help us all!

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Ian Watson

Dec 21, 2012 at 09:48

Let us beware of any "hidden" small print, perhaps to enforce exchange controls in future to prevent capital flight . . .

when the economic s**t hits the fan in the next few years when the debt burden explodes, interest rates spiral, etc . . .

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John Smyth 3

Dec 21, 2012 at 10:05

@Yvonne Goodwin

Yes Yvonne ring fencing along with restrictions on derivative trading, trading in junk packaged mortgages with the publics money would have stopped or reduced the banking crisis. Limiting mergers and acquisitions in order to preserve competion and stop any single bank becoming too big to fail. By the way it was not just a UK banking crisis it was USA and Europe also.

The greed of the types of people attracted to the top jobs in banking has to be combated and regulated. Their earnings need to be brought more in line with those of manufacturing industry. They confirmed what those of us who think know, "They are nothing like as clever as they thought they were." They are far from it and would mostly now be unemployed if their banks were not bailed out by us the tax payers.

I have read the article you referred to but the first thing you need to look into is how Miles Saltiel earns his living. Advising banks is a major part of it. He is never going to bite the hands that feed him

He states that there was more than enough regulation in place (I don't agree with him on this though.) to help avoid the crisis but that it was not applied but he does not say why that was. He knows why but does not want to admit it. The reason what regulation there was was not applied or enforced was that the banks had infiltrated the FSA with their own place people who did whatever the banks wanted. Adair Turner admitted to a parliamentary committee that the FSA could not resist the huge lobbying power of the banks. Callum McCarthy was ex Barclays and Sants who was UBS has just been given his reward for what he acheived for the banks.

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Man of Kent

Dec 21, 2012 at 10:43

I wonder what research Miles Saltiel relied on in placing Bradford & Bingley and Halifax at the heart of the regeneration of South Yorkshire when both institutions were firmly based in West Yorkshire. Discussions with colleagues at Bradford & Bingley (where I worked) seem to confirm that although its reinvention as a bank contributed in no small measure to its demise, this was mainly due to a CEO firmly in Peter Principle territory who construed a 'back to our core values' business model as an attempt to corner the UK buy-to-let market. I'm sure this approach would have sat neatly within the ring fence.

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