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| Bank reform plans should be tougher, Banking Commission says | Bank reform plans should be tougher, Banking Commission says |
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| Government plans to ring-fence the banks - protecting retail banking from the riskier investment side - "fall well short of what is required", a report has warned. | Government plans to ring-fence the banks - protecting retail banking from the riskier investment side - "fall well short of what is required", a report has warned. |
| The Banking Standards Commission wants the government to "electrify" the fence so banks won't try to "game" the rules. | The Banking Standards Commission wants the government to "electrify" the fence so banks won't try to "game" the rules. |
| That means regulators having the power to fully break up a bank if it does not follow the ring-fence proposals. | That means regulators having the power to fully break up a bank if it does not follow the ring-fence proposals. |
| The bank reforms will go before Parliament early next year. | The bank reforms will go before Parliament early next year. |
| 'Electrification' | 'Electrification' |
| The Parliamentary Commission on Banking Standards, known as the Banking Commission for short, was asked by Chancellor George Osborne to study the draft version of the government's Financial Services (Banking Reform) Bill. | The Parliamentary Commission on Banking Standards, known as the Banking Commission for short, was asked by Chancellor George Osborne to study the draft version of the government's Financial Services (Banking Reform) Bill. |
| This follows last year's recommendation by the Independent Commission on Banking, which was led by Sir John Vickers. | This follows last year's recommendation by the Independent Commission on Banking, which was led by Sir John Vickers. |
| Sir John concluded that ring-fencing was the best way to protect "core" retail banking activities from any future investment banking losses, such as were seen during the global financial crisis. | Sir John concluded that ring-fencing was the best way to protect "core" retail banking activities from any future investment banking losses, such as were seen during the global financial crisis. |
| The government's proposed bill hinged on three main aspects: | The government's proposed bill hinged on three main aspects: |
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| But the government's draft legislation was a watered-down version of the Vickers report which proposed quite a high degree of separation, said Andrew Tyrie, chairman of the Banking Standards Commission. | But the government's draft legislation was a watered-down version of the Vickers report which proposed quite a high degree of separation, said Andrew Tyrie, chairman of the Banking Standards Commission. |
| "The proposals as they stand [in the Bill], fall well short of what is required," he said. | "The proposals as they stand [in the Bill], fall well short of what is required," he said. |
| "What we've done with the Commission proposals is to put back some of that stiff separation into the ring-fence and then make clear that the key problem - that banks are going to be at the ring-fence all the time, which will be a nightmare for regulators - needs to be dealt with," he told the Today programme. | "What we've done with the Commission proposals is to put back some of that stiff separation into the ring-fence and then make clear that the key problem - that banks are going to be at the ring-fence all the time, which will be a nightmare for regulators - needs to be dealt with," he told the Today programme. |
| "And the way to do that is to say to banks 'If you don't try to game this ring-fence we won't see the need to separate you.' | "And the way to do that is to say to banks 'If you don't try to game this ring-fence we won't see the need to separate you.' |
| "Then they will have a massive incentive then to get to a point where banks have certainty [not to be broken up]." | "Then they will have a massive incentive then to get to a point where banks have certainty [not to be broken up]." |
| "That is why we recommend electrification. The legislation needs to set out a reserve power for separation - the regulator needs to know he can use it." | "That is why we recommend electrification. The legislation needs to set out a reserve power for separation - the regulator needs to know he can use it." |
| Ring-fencing explained | Ring-fencing explained |
| Under the draft bill, ring-fencing would ensure that retail services of a struggling lender can be carried on independently and smoothly even if authorities let the rest of the group fail. | |
| Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full | Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full |
| For example, in the case of a failing banking group, regulators could sell off its core activities - thereby maintaining continuity for depositors - while allowing the rest of the organisation to go through a bankruptcy process. | For example, in the case of a failing banking group, regulators could sell off its core activities - thereby maintaining continuity for depositors - while allowing the rest of the organisation to go through a bankruptcy process. |
| Secondly, retail deposits (but not pension liabilities) would be ranked ahead of the claims of other bank creditors in the event of a bank insolvency. | |
| Thirdly, banks are to hold a sufficient capital buffer - as outlined by global regulators - which means that if banks do fail, losses can be absorbed by shareholders and other creditors rather than the taxpayer. | Thirdly, banks are to hold a sufficient capital buffer - as outlined by global regulators - which means that if banks do fail, losses can be absorbed by shareholders and other creditors rather than the taxpayer. |
| Under the draft legislation, the Treasury would have the authority to decide which banks ring-fencing should apply to, as well as specific activities to be undertaken, within ring-fenced banks. | Under the draft legislation, the Treasury would have the authority to decide which banks ring-fencing should apply to, as well as specific activities to be undertaken, within ring-fenced banks. |
| The Prudential Regulation Authority, which will become the UK's regulator for deposit-taking institutions in April under the Bank of England, would have the power to ensure the ring-fenced bank to carry on with its business. | The Prudential Regulation Authority, which will become the UK's regulator for deposit-taking institutions in April under the Bank of England, would have the power to ensure the ring-fenced bank to carry on with its business. |
| Mr Tyrie has also called on independent reviews of the effectiveness of the ring-fence proposals across all banks to take place at least once every four years. | Mr Tyrie has also called on independent reviews of the effectiveness of the ring-fence proposals across all banks to take place at least once every four years. |
| 'Perpetual uncertainty' | 'Perpetual uncertainty' |
| "Remember at the moment banks will probably behave but in the long run they will find a way to gaming the ring-fence if they don't have a strong disincentive to do so," he told the BBC. | "Remember at the moment banks will probably behave but in the long run they will find a way to gaming the ring-fence if they don't have a strong disincentive to do so," he told the BBC. |
| "In 10-20 years time... people will get complacent. At that point it's crucial to have a set of rules to keep banks well away from testing this ring-fence." | |
| Anthony Browne, the chief executive of the British Bankers' Association (BBA), welcomed the report, but warned that uncertainty over banks' prospects could have a negative impact on their ability to lend. | Anthony Browne, the chief executive of the British Bankers' Association (BBA), welcomed the report, but warned that uncertainty over banks' prospects could have a negative impact on their ability to lend. |
| "The risk here is creating uncertainty. If it's perpetually hanging over the banking sector that individual banks or the whole sector could be broken up at some point, then it's going to be difficult to return to having an investable banking sector that can be customer-focused and globally competitive and do what it should be doing, which is lending to homeowners and businesses," he said. | "The risk here is creating uncertainty. If it's perpetually hanging over the banking sector that individual banks or the whole sector could be broken up at some point, then it's going to be difficult to return to having an investable banking sector that can be customer-focused and globally competitive and do what it should be doing, which is lending to homeowners and businesses," he said. |
| Ed Balls, Labour's shadow chancellor said: "As Ed Miliband and I said at the Labour conference this year, if the letter and spirit of the Vickers proposals are not delivered and we do not see cultural change in our banks, full separation will be necessary. | Ed Balls, Labour's shadow chancellor said: "As Ed Miliband and I said at the Labour conference this year, if the letter and spirit of the Vickers proposals are not delivered and we do not see cultural change in our banks, full separation will be necessary. |
| "The Commission is clearly right to say the jury is still out and to demand a reserve power for full separation of the banks." | "The Commission is clearly right to say the jury is still out and to demand a reserve power for full separation of the banks." |
| 'Consensus commitment' | 'Consensus commitment' |
| The Commission's report comes a month after Mr Osborne urged its members not to send the government's proposed reform "back to square one" by "unpicking" the consensus on how it should be carried out. | The Commission's report comes a month after Mr Osborne urged its members not to send the government's proposed reform "back to square one" by "unpicking" the consensus on how it should be carried out. |
| A Treasury spokesman said on Thursday evening: "The government is committed to reforming the financial sector and putting in place a regulatory structure that learns the lessons of the past and protects taxpayers in the future." | A Treasury spokesman said on Thursday evening: "The government is committed to reforming the financial sector and putting in place a regulatory structure that learns the lessons of the past and protects taxpayers in the future." |
| "It has been committed to building consensus and has consulted widely on these reforms over the last two and half years. The Banking Reform Bill is the next step in that. | "It has been committed to building consensus and has consulted widely on these reforms over the last two and half years. The Banking Reform Bill is the next step in that. |
| "The government is grateful to the Parliamentary Commission on Banking Standards for its scrutiny of the draft bill and notes that it, 'welcomes the government's action to bring forward legislation to implement a ring-fence'." | "The government is grateful to the Parliamentary Commission on Banking Standards for its scrutiny of the draft bill and notes that it, 'welcomes the government's action to bring forward legislation to implement a ring-fence'." |
| The spokesman added that the government would study the report and respond in detail when the Financial Services (Banking Reform) Bill is formally introduced to Parliament early next year. | The spokesman added that the government would study the report and respond in detail when the Financial Services (Banking Reform) Bill is formally introduced to Parliament early next year. |