The Independent Commission on Banking: What will the ICB report say?
Saturday, 10 September 2011 12:00
The Independent Commission on Banking (ICB) will publish its highly anticipated report on banking reform on Monday morning at 7am.
All eyes will be focusing on the coalition government’s response to the report. It is expected that the report, headed by Sir John Vickers, will call on UK banking retail operations to be separated from their investment arms.
Despite widespread lobbying from bank chiefs who have pleaded with the Prime Minister, David Cameron and the Chancellor, George Osborne that now is not the right time to implement banking reforms, it is expected that the government will act to implement the recommendations. The question is, at what pace?
David Cameron said this week that he will not take any action that could hinder economic growth or jobs. He also acknowledges that in practice, the process of separating the retail banking of millions of UK customers of big banks such as Barclays, RBS and Lloyds will take some time.
However, the government is also aware that the markets, investors and the wider economic community need to be sure that they understand what is happening and that the reforms are clear, not ambiguous, even if it does take years for them to be implemented.
Ring fencing banking operations is a process that is likely to take many years to set up and it is felt that the government is sympathetic to how the recommendations should be implemented, and likely to allow the reforms to be phased in over a number of years, taking the whole process through to the next parliamentary term, beginning in 2015.
Sir John Vickers is set to recommend that banks set up a ring fencing structure to protect the funds of their customers in the event of another banking crisis and to install a bail-in framework that would force bondholders to take losses if necessary.
However, the reforms need to be implemented in a considered way to avoid the re-pricing of credit and the downgrade of ratings and further nervous responses from banks and investors, the last thing that the financial markets need at the moment.
If banks know that they cannot rely on the taxpayer funded government bailouts when they are in trouble, the risk of lending to banks will be perceived to have increased. This means that it will cost more for banks to borrow, and that will mean the cost of lending to businesses and individuals will go up. Bearing in mind that one of the main criticisms of the banks since the credit crunch has been their inability to lend and help kick-start the economy, this is a difficult dilemma for the government.
Analysts believe that the recent heavy falls in the value of bank shares may be a sign that investors have already priced in the anticipated effects of the proposed ICB reforms.
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