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Retail banks should be ring-fenced, says commission Retail banks should be ring-fenced, says commission
(40 minutes later)
UK banks' retail operations should be "ring-fenced" from their investment banking arms, the Independent Commission on Banking has recommended.UK banks' retail operations should be "ring-fenced" from their investment banking arms, the Independent Commission on Banking has recommended.
However, in its interim report the commission stopped short of recommending to two should operate as separate entities.However, in its interim report the commission stopped short of recommending to two should operate as separate entities.
The final report will be published in September.The final report will be published in September.
The commission was set up by the government last June to review UK banks after the financial crisis.The commission was set up by the government last June to review UK banks after the financial crisis.
Its report said that, in the build-up to the crisis, lenders and borrowers took on "excessive and ill-understood risks".Its report said that, in the build-up to the crisis, lenders and borrowers took on "excessive and ill-understood risks".
It added that implicit taxpayer support encourages "too much risk taking" by banks.It added that implicit taxpayer support encourages "too much risk taking" by banks.
The commission said that banks needed to hold more cash in reserve to protect against future crises, and that creditors, not taxpayers, should be liable for any losses.The commission said that banks needed to hold more cash in reserve to protect against future crises, and that creditors, not taxpayers, should be liable for any losses.
'Allowed to fail'
It said it was looking at forms of "retail ring-fencing" under which retail banking would would be carried out by a separate subsidiary within a wider banking group.It said it was looking at forms of "retail ring-fencing" under which retail banking would would be carried out by a separate subsidiary within a wider banking group.
This would lead to additional costs to the banks, some of which would fall on the wider economy, it said. Sir John Vickers, chairman of the commission, told the BBC that "total separation [of retail and investment banking] is not necessary".
However, these costs would be more than offset by the benefits of "materially reducing the probability and impact of financial crises". "UK retail banking can be protected by its own capital cushion. Other parts of the bank should be allowed to fail."
This would lead to additional costs to the banks, some of which would fall on the wider economy, he said.
"The cost of capital is going to go up", Sir John said, but the costs to investment banks would be greater than those to retail banks.
However, these costs would be more than offset by the benefits of "materially reducing the probability and impact of financial crises", the report said.
The report also recommended that Lloyds Banking Group sell some of its branches in order to increase competition in High Street banking.The report also recommended that Lloyds Banking Group sell some of its branches in order to increase competition in High Street banking.
Lloyds is already in the process of selling about 600 branches, but Mr Vickers said competition in High Street banking would benefit from further branch sales.