ICB has published its interim report on reform of the UK banking structure. The report:

  • stresses the need for better macro-economic regulation which makes banks and the system better able to absorb losses, makes it easier to deal with troubled banks and discourages excessive risk-taking;
  • recommends a 10% equity baseline as an international standard for systemically important banks and UK retail banking operations (as opposed to the general 7% set out in Basel III). Provided retail banking is protected, it says, the UK need not exceed international standards;
  • looks at ways to improve loss-absorption including contingent capital, debt capable of "bail-in" and ranking claims of ordinary depositors above those of other unsecured creditors;
  • looks at whether UK retail banking should be separated from wholesale and investment banking. It notes advantages in ring-fencing retail banking. The ICB thinks the two types of banking are distinguishable and present different risks. It thinks full separation of the two types of banking into different entities with restrictions on cross-ownership has advantages but also disadvantages, and so favours a model that would ring-fence retail banking operations in a separate subsidiary within a banking group. It would require universal banks to maintain minimum capital ratios and loss-absorbing debt for UK retail banking operations but subject to that would allow them to transfer capital between different banking activities;
  • considers the costs of separating activities, and concludes the subsidiary ring-fencing option would provide the best cost-benefit solution;
  • notes the need to improve competition in UK banking, which will not be solved simply by Lloyds divesting the package required by the European Commission. The report notes the problems in switching accounts and hopes the new Financial Conduct Agency can help promote effective competition; and
  • says the reforms suggested should not adversely affect UK banking's international position.

The ICB welcomes views on its proposals by early July, and will publish its final report in September. (Source: Interim Report of Independent Commission on Banking)