Wolters Kluwer: Understanding the Banking reform Bill
Posted: 2 July 2013 | Source: Wolters Kluwer
The government’s Financial services (Banking reform) Bill now going through Parliament will force the biggest UK banks to separate their retail and wholesale banking arms, and impose on all uK banks a number of other changes. The objectives are to make the banking sector safer and more resilient to shocks, to make banks more resolvable in the event of failure, and to ensure that banks and their shareholders, not taxpayers, are responsible for the costs of dealing with banks that get into trouble.
Although banks are resigned to the legislation, much of it recommended by the independent commission on Banking in 2011, they are concerned about the implications. They have particular reservations about a late amendment to the Bill, made just before its introduction to the House of Commons. The change was made on the recommendation of the Parliamentary commission on Banking standards (PCBS), which scrutinised the draft bill.
The amendment in question is to strengthen – or “electrify” – the ring-fences that banks will have to erect around their retail and SME (small and medium-sized enterprise) banking divisions to protect them from their more volatile wholesale and investment banking activities.
The ring-fence provision was already in the draft bill, but now it has been electrified. this means that if a bank breaks through the fence the consequences could be painful, with the new Prudential regulatory authority (PRA) being able to step in and enforce separation by completely breaking up the bank.