- Independent Commission on Banking, Final Report, available at http://bankingcommission.s3.amazonaws.com/wp-content/uploads/2010/07/ICB-Final-Report.pdf (hereinafter Final Report), para 3.3.
- Ibid
- Ibid, para 3.4.
- Only ring-fenced banks would have permission to provide “mandated services” (Final Report, para 3.13). Mandated services are banking services where a temporary interruption to the provision of the service on the failure of the bank would have significant economic cost and customers are not “well equipped to plan for such an interruption” (Ibid). This would generally consist of taking deposits from and providing overdrafts to individuals and SMEs. A temporary interruption would cover any period up to seven days (Ibid, para 3.13 (n 10)). Medium-sized companies are defined under the Companies Act 2006 (for the purposes of reporting requirements) as either having a turnover of less than £25.9m and/or a balance sheet of less than £12.9m and fewer than 250 employees.
- Ring-fenced banks should be prohibited from providing banking services which make it significantly harder or more costly to resolve the bank, directly increase the exposure of the bank to global fi nancial markets, involve the bank taking risk which is not integral to the provision of payment serv ices or direct intermediation or in any other way threaten the objectives of the ring-fence (Final Report, para 3.9). Prohibited services would include: (a) any service not provided to EEA customers; (b) any exposure to a non-ring-fenced bank or non-bank financial organisation (except for exempt payments); (c) any trading book asset; (d) any market risk instrument; (e) derivatives activities requiring the holding of regulatory capital against counter party credit risk; and (f) secondary market activity including the purchase of loans or securities (Ibid).
- Principle 3 specifies that the only activities that a ring-fenced bank should be permitted to engage in are those that are not prohibited and ancillary activities necessary for the efficient provision of such services and not as a stand-alone line of business (Final Report, para 3.57). The Report refers to this as including employing staff and owning or procuring necessary operational infrastructure as well as Treasury function activities, including risk and liquidity management and funding subject to “backstop limits” on wholesale funding and total secured and unsecured exposures to non-ring-fence banks and other non-bank financial companies (Ibid).
- Where a ring-fenced bank is part of a larger corporate group, the authorities must be able to isolate it from the rest of the group within days and continue to provide services without solvency support (Final Report, para 3.74). Ring-fenced banks must be separate legal entities. Subsidiaries can only carry on activities that their parent company is permitted to carry out. Ring-fenced banks must have access to all wider group operations, staff, data and other services to continue its activities. The ring-fenced bank must be a direct member of all relevant payment systems or have an appropriate agent bank arrangement (Ibid).
- Where a ring-fenced bank is part of a larger corporate group, its relationships with the group must be conducted on a third- party basis with the bank not being dependent for its solvency or liquidity on the financial stability of the wider group (Final Report, para 3.85). This would require in particular: (a) group relations should be given no more favourable treatment than third-party relationships (apart from with other ring-fenced banks within the group); (b) all transactions must be conducted on a commercial and arm's length basis with sound and appropriate risk-management practices; (c) additional regulatory obligations should be imposed to ensure (b) where this is not already in place; (d) intra-group asset disposals should only be at market value with the ring-fenced bank only acquiring other group assets through non-prohibited services; (e) the ring-fenced bank should be regulated on a solo basis with regard to capital, large exposures, liquidity and funding; (f) dividend payments and capital transfers can only be made where the board is satisfied that the bank has sufficient financial resources; (g) the board of the ring-fenced bank must be independent with a majority of non-executive directors with one as chair and with only one common member of a parent or other group company board; (h) the ring-fenced bank should make all relevant corporate or market disclosures on a solo basis; and (i) the boards of the ring-fenced bank and parent company should be under an obligation to maintain the integrity of the ring-fence and ensure that the ring-fence principles are complied with at all times (Ibid).
- On the definition of mandated services, see n 4 supra. While the Commission states that the two conditions of costs and contingency planning should only apply to retail and SME activity, the wide definition may cause difficulties in practice. Restricting the provision of mandated services only to ring-fenced banks may also limit the supply of credit to retail and SME customers contrary to the Report's intention (Final Report, paras 3.9–12). The Report appears to suggest that “permission” to carry on mandated services would not be automatically provided to other EU-licensed institutions which would have to apply for separate permission in the UK. This may be considered contrary to EU law (Final Report, para 3.13 (n 9)). The Com mission appears to accept that other EU institutions would be able to provide mandated services through branching without being subject to the ring-fence requirements (Final Report, para 3.68). The Commission rejects any competitive advantage argument as any additional cost burden would only apply to the rest of the group (Ibid). This still ignores the fi nancialstabil ity implications of full EEA branching of mandated services outside the ring-fence. The Report only states that, ‘While it might be possible to secure changes to the relevant EU law, there seems little reason to pursue this difficult and uncertain course given that the merits of the economic arguments do not clearly favour full separation' (Final Report, para 3.69). Mandated services could be provided by UK branches of foreign banks although the Report states that significant banks based outside the EEA should generally be required to establish a separate UK subsidiary (Final Report, para 3.14). Retail ring-fencing would then be supported by international ‘sub-sidiarisation’. The ring-fence requirements would generally not apply to the foreign subsidiaries of UK-headquartered banking groups ‘unless they were subsidiaries of a ring-fence bank’ which would extend the ring-fencing globally (Final Report, para 3.14). The Commission rejects the need for any de minimis exception for smaller banks (Final Report, para 3.15).
- Prohibited services would include: (a) structuring, arranging or executing derivatives transactions as agent or principal; (b) investing in stock, corporate debt securities, convertible/exchangeable securities, convertible bonds, partnership interests, mutual funds and exchange traded funds; (c) originating, trading, lending or making markets in securities (including debt securities, equity, derivatives and asset-backed) obligations; and (d) underwriting the sale of debt and equity securities, including private placements. Ring-fenced banks would still be able to originate and retain portions of ‘own-label securitisations’ subject to holding appropriate capital against these retentions (Final Report, Figure 3.6, p 54).
- Permitted activities (other than ancillary activities) which would be carried on within the ring-fence would include services provided to individuals and non-financial companies of any size within the EEA including lending on a secured and unsecured basis (including mortgages and credit cards, trade finance and project finance and advising on and selling products from non-ring-fence banks where no exposures would otherwise rise) (Final Report, Figure 3.6, p 54). Ring-fenced banks would be prohibited from providing services, other than payments services, to any bank which is not a ring-fenced bank and to all other non-bank financial companies (Final Report, para 3.45). The Commission rejects the definition of financial institutions used by the Basel Committee and under EU law and proposes the development of a separate definition for ring-fencing purposes (Final Report, Box 3.3, p 58).
- See, eg, J Kay, Narrow Banking: The Reform of Banking Regulation (Centre for the Study of Financial Innovation, 2009), available at http://www.johnkay.com/2009/09/15/narrow-banking.
- Final Report, paras 3.20–24.
- See, eg L Kotlikoff, Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking (John Wiley & Sons, 2010).
- Final Report, para 3.22.
- On the Volker Rule, see Section D.7 below. See also paras 4.94–99 of the Interim Report.
- Final Report, para 3.27.
- Ibid, para 3.34.
- Ibid, para 3.28 and Box 2.1, p 32.
- Ibid, paras 3.59–70.
- Ibid, para 3.64.
- Ibid, para 3.67.
- Ibid, para 3.67.
- Ibid, para 3.97.
- Ibid, para 3.98.
- Ibid, para 3.99 and Chapter 4.
- Ibid, paras 4.1–2. Regulatory papers either refer to Global Systemically Important Banks (G-SIBs) or Global Systemically Important Financial Institutions (G-SIFIs) more generally.
- Ibid, para 4.2.
- Ibid, Para 4.11.
- Ibid, para 4.13. Substantial new leverage creates an “overhang” of outstanding debt that must be paid off in subsequent years.
- CET1 consists of common equity and retained earnings. AT1 is made up of preference shares and perpetual subordinated debt with tier 2 consisting of long term subordinated debt of over fi ve years (Final Report, Box 4.2, p 84).
- Final Report, paras 424–26 and Box 4.3. On loss absorbing debt, see Section A.4 infra.
- Final Report, para 4.39.
- Interim Report, paras 4.29 and 4.34; Final Report, paras 4.30 and 4.31.
- Final Report, paras 4.42 and 4.47.
- Ibid, paras 4.50–51.
- IMF, United Kingdom Spillover Report for the 2011 Article IV Con sultation and Supplementary Information (2011), available www.imf.org/external/pubs/ft/scr/2011/cr11225.pdf.
- Basel Committee, Global Systemically Important Banks: Assess ment Methodology and the Additional Loss Absorbency Requirement (2011).
- European Commission, Proposal for a Regulation of the European Parliament and of the Council on Prudential Requirements for Credit Institutions and Investment Firms (2011).
- Final Report, paras 4.52 and 4.54.
- Ibid, Fig 4.3, p 98.
- Ibid, para 4.57.
- Ibid, para 4.58.
- Ibid, paras 4.65–66. See also European Commission, Technical Details of a Possible EU Framework for Bank Recovery and Resolution (2011); FSB, Effective Resolution of Systemically Important Financial Institutions (2011); and FSA, Recovery and Resolution Plans (2011) CP11/16.
- Final Report, paras 4.67–70.
- Ibid, paras 4.72 and 4.76.
- Ibid, para 4.78.
- Ibid, para 4.79.
- Ibid, para 4.86. The acronym “RRPs” (recovery and resolution plans) is used slightly inconsistently in different papers. The FSB includes “Recovery Plans” (RCPs) and “Resolution Plan” (RSPs) within RRPs with RSP then covering Special Resolution Regimes (SRRs) as well. It is clearer if RRPs are used for pre-crisis internal living wills and SRRs for post-crisis official support powers. See FSB, Effective Resolution of Systemically Important Financial Institutions (2011).
- Ibid, para 4.120 t.
- Ibid, paras 4.108–110 and Figures 4.4 and 4.5. This suggested that a loss absorbing capacity in the range 16–24% would have been sufficient to absorb almost all of the losses suffered during the recent financial crisis and other crises.
- Ibid, paras 4.111–17.
- Ibid, para 4.128.
- Ibid, para 4.124.
- Ibid, para 4.98.
- Ibid, paras 488–90.
- Ibid, para 4.93. See also FSB, supra n 49.
- Final Report, para 4.99.
- D Cruickshank, Competition in UK Banking (Report to the Chancellor of the Exchequer, 2000).
- Final Report, paras 6.11–14.
- Final Report, Chapter 6. See, eg, M O'Hara and W Shaw, “Deposit Insurance and Wealth Effects: The Value of Being ‘Too Big to Fail’” (1990) 45 Journal of Finance 1597; and D Morgan and K Stiroh, “Too Big to Fail After All These Years” (Federal Reserve Bank of New York, 2005), Staff Report No 220. See also MM Schmid and I Walter, “Do Financial Conglomer ates Create or Destroy Economic Value?” (2009) 18 Journal of Financial Intermediation 193; and P Gandhi and H Lustig, “Size Anomalies in US Bank Stock Returns: A Fiscal Explanation“, NBER Working Paper 16553 (2010). The Report compares the credit ratings notch advantage of large banks through sepa rate stand-alone and support ratings. This generally recognises a 0.75–1 notch difference between large and medium banks and 0.8–0.6 difference between medium and small banks before and after the crisis (Final Report, Figure 6.2, p 167). The Commission also accepts evidence that ratings are not dependent on bank size. Barclays, Perspectives on Valuing a Perceived Public Guarantee of the Banking System (2011), available at http://bankingcom-mission.independent.gov.uk/wp-content/uploads/2011/07/Barclays-perspective-on-implicity-subsidy.pdf.
- Final Report, Chapter 7.
- Ibid.
- Ibid, para 8.6.
- European Commission, United Kingdom Restructuring of Lloyds Banking Group (2009) State Aid No N428/2009 available at http://ec.europa.eu/eu_law/state_aids/comp-2009/n428-09.pdf. This consisted of: (a) a personal current account (PCA) market share of 4.6%; (b) 600 branches (including branch infrastructure, staff, customers, customer accounts and support infrastructure); (c) 19.2% of LBG retail mortgage assets; (d) the TSB brand; (e) the Cheltenham & Gloucester mortgage and savings network; (f) Lloyds TSB Scotland's branches and banking licence; (g) supplementary branches in England and Wales to make up the 600; and (h) the Intelligent Finance internet and telephone bank with current account, mortgage and savings customers (Final Report, Box 8.1 p 207).
- Final Report, paras 8.7–8.
- Ibid, paras 8.11–13.
- Ibid, para 8.31. Existing bank LDRs varied between 98% (Clydesdale Bank) and 148% (LBG Retail Division) with RBS UK Retail having an LDR of 11% under target of 100% LDR by 2013 (Final Report, Table 8.2 and para 8.17).
- Final Report, Box 8.2, p 213.
- Ibid, para 8.41.
- Ibid, para 8.44.
- Ibid, para 8.45.
- Ibid, para 8.6.
- Ibid, para 8.47.
- Ibid, para 8.48. See also D Birch, An Idea for the Independent Commission on Banking (2011) available at www.convergenceconversation.com/posts/dave.birch/an-idea-for-the-independent-commission-on-banking.
- Final Report, para 8.57.
- Ibid, paras 8.58–59. The OFT and CC recommendations on transparency and switching were estimated to generate benefits of between £211mm and £1,093m (Final Report, para 8.69).
- Final Report, para 8.71.
- Ibid, paras 8.72–73.
- Ibid, para 8.74.
- HM Treasury, A New Approach to Financial Regulation: The Blue print for Reform (2011).
- Final Report, para 8.86.
- Ibid, para 8.87.
- Ibid, para 8.94.
- Ibid, Chapter 5.
- Basel Committee, An Assessment of the Long-Term Economic Impact of Stronger Capital and Liquidity Requirements (2010).
- Final Report, para 5.8.
- Ibid, para 5.9 and Figure 5.1.
- See CM Reinhart and KS Rogoff, “Growth in a Time of Debt” (2010) 100 American Economic Review 573.
- Final Report, paras 5.14–16.
- G Barlevy, “The Cost of Business Cycles and the Benefits of Stabilisation” (2005) 29 Federal Reserve Bank of Chicago Economic Perspectives 32.
- Final Report, para 5.50.
- Ibid, para 5.54.
- Ibid, para 5.67.
- Ibid, para 5.71, on the assumption set out para 5.70.
- Ibid, para 5.74.
- Ibid, para 5.76.
- Ibid, para 5.98.
- Ernst & Young, “The UK Independent Commission on Banking Report—Flexibility Forces Fundamental Change” (September 2011).
- “Moody's Downgrade Hits UK Banks', Reuters, 7 October 2011.
- “Moody's Downgrades Big Banks on Changed Policy', Reuters US 21 September 2011. This would increase the cost to insure $10m of Bank of America debt for 5 years by 48 basis points to $378,000 in the credit default market per year.
- ‘UK Government Fears New RBS Bail-out’, Financial Times 7 October 2011.
- C Goff, ‘Just the Facts: The Vickers Report', Financial Times 13 September 2011.
- Financial Times 7 October 2011.
- Supra n 9, para 2.
- Ibid.
- D Coyle and J Haskel, ‘Vickers’ Critics Are Missing the Point”, Financial Times 13 September 2011.
- J Kay, “Taming the Banks: Long Overdue or Utter Folly?”, Financial Times 14 September 2011, 15.
- Ibid, col 3.
- “Sweeping Change Proposed for UK Banks”, Financial Times 12 September 2011, 1.
- G Parker, “Osborne Praises ‘Impressive’ Proposals”, Financial Times 13 September 2011.
- HM Treasury, A New Approach to Financial Regulation: Building a Stronger System (July 2011) with Draft Financial Services Bill attached.
- J Johnson, ‘Regulate in Haste, Repent at Leisure', Financial Times 12 September 2011. There was “an understandable desire” for fundamental regulatory reform with the temptation being “to design a regulatory regime capable of sheltering the taxpayer from the thousand-year storm”. It would nevertheless be futile “to grind all risk out of the system in pursuit of an unachievable nirvana of financial stability” which would “in the end only be at the cost of economic growth”.
- Johnson refers to the Vickers's ‘belt-and-braces approach’ as possibly having “underestimated the cumulative impact of the reforms already underway” or in the pipeline (Ibid, col 3).
- Ibid.
- J Guthrie, ‘Vickers Plays Whack-a-Rat with Banking Risk’, Financial Times 12 September 2011.
- T Alloway, ‘Bank Bondholders May Face Future Losses’, Financial Times 13 September 2011.
- “If UK bank share prices stay calm for a while, it may even embolden other jurisdictions to move forward with a more ambitious structural re-regulation, that goes beyond Basel-style capital requirements.” The Lex column in the Financial Times noted that neither argument was “a legitimate reason not to implement the ICB's proposals”. It continued that, “It is hard to find grounds for bankers to complain in the detail of the ICB's proposals.” Lloyds and Barclays share prices rose while European bank stocks fell sharply. ‘UK Banks’, Financial Times 12 September 2011, Lex.
- Richard Lambert considered that the “impact on the City of London will be broadly neutral, and banks will have no new incentives to relocate elsewhere, since the proposed regulations will apply primarily to the high street business which by definition has to stay where it is”. R Lambert, ‘Vickers Strikes a Reasonable Tone’, Financial Times 12 September 2011.
- Ibid.
- Treasury Committee, Independent Commission on Banking (19 July 2011) Nineteenth Report.
- Restated in Box 1.1 on p 20 of the Final Report and reused throughout the Executive Summary, 7–18.
- Final Report, paras 4.88–101 The Commission's recommenda tion with regard to automatic depositor preference may not raise many objections. This appears to strengthen further the position of retail depositors and SMEs. In practice, most account holders will be paid under the Financial Services Compensation Scheme (FSCS) with the preference simply allowing the FSCS to recover in priority to other creditors. This is more of a technical subordination rather than a substantive amendment except where account holders may not have split their deposits over different accounts in separate institutions to qualify for the highest levels of protection available.
- 'Barclays, HSBC, LBG and RBS, Project Merlin – Banks' Statement (9 February 2011) Revised.
- The Treasury, the Bank of England, and the FSA, Banking Reform – Protecting Depositors: A Discussion Paper (October 2007); the Treasury, the Bank of England, and the FSA, Financial Stability and Depositor Protection: Strengthening the Framework (January 2008) Cm 7308; Tripartite Authorities, Financial Stability and Depositor Protection (July 2008); and Tripartite Authorities, Financial Stability and Depositor Protection: Special Resolution Regime (July 2008) CM 7459. See also HM Treasury, Financial Stability and Depositor Protection: Cross-Border Challenges and Responses (September 2008).
- Payment services are not considered separately under permitted, prohibited or ancillary services in Chapter 3.
- Final Report, Figure 3.6 on p 54.
- Ibid, para 3.48 p 58.
- Ibid, para 2.12t.
- Ibid, paras 2.12 and 3.73.
- Ibid, para 4.21. See also paras A2.12–13, Final Report Annex 2 and Box A2.1.
- Section 1.2 supra.
- Section 5.7 infra.
- Basel Committee, Strengthening the Resilience of the Banking Sector (December 2009); and Basel Committee, Minimum Requirements to Ensure Loss Absorbency at the Point of Non-viability (January 2011).
- Final Report, para 5.75.
- The Commission summarises these failings and at Lehman Brothers in Box 2.1 on p 32. Most of the recommendations for correction are then based on additional capital and loss absorbency with higher (unspecified) liquidity and strengthened supervision without the need for a ring-fence directly.
- Final Report, paras 6.25–30.
- Walker, ‘The Independent Commission on Banking – Interim Findings and Comment' (2011).
- Final Report, para 6.25.
- Ibid, n 123, para 5.75.
- Ibid, para 2.12. See also Ibid, para 3.73. On RRPs, see also paras A2.14–18, Final Report Annex 2.
- Section 5.2 supra.
- These included: the Term Discount Window Programme (TDWP); the Term Auction Facility (TAF); Reciprocal Currency Arrangements (RCAs) entered into with other selected investment banks; the Primary Dealer Credit Facility (PDCF); the Term Securities Lending Facility (TSFL); the Term Securities Lending Facility Options Programme (TSLFOP); other Securities Lending; Transitional Credit Extensions (TCEs) for US and London broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch; as well as the ABCP Money Market Funding Liquidity Facility (MPFLF); the Commercial Paper Funding Facility (CPFF); the Money Market Investing Funding Facility (MMIFF); and the Term Asset-Backed Securities Loan Facility (TABSLF).
- The Commission accepts the importance of reputational links at Final Report, para 3.61.
- FSB, Principles for Sound Compensation Practices (2009); Basel Committee, Compensation Principles and Standards Assessment Methodology (January 2010); FSA, ‘Draft Code on Remuneration Practices’ (18 March 2009). See also FSA, Handbook of Rules and Guidance, ‘Remuneration Code’ (SYSC 19A) Loose-leaf online available http://fsahandbook.info/FSA/html/handbook/SYSC/19A.
- Supra n 16.
- Final Report, para 8.84.
- Interim Report, paras 5.3–14; and Final Report, para 8.7.
- Final Report, para 5.98; and Section 4 supra.
- Supra n 64.
- 'Virgin buys Northern Rock for £747m', Financial Times 17 November 2011, 1.
- Final Report, para 8.55.
- Section B.2 and E.2 supra.
- Section B.2 supra.
- www.hm-treasury.gov.uk/fin_stability_regreform_icb.htm.
Law and Financial Markets Review
Volume 5, 2011 - Issue 6