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.