The Independent Commission on Banking (ICB) published its Final Report (known as the Vickers Report)(the Report) on 12 September. Many of the Report's recommendations were expected and predictable, but banks nevertheless waited impatiently to read the final recommendations and the timescale for change. In this article, we outline the Report's key recommendations and their potential effects on the UK banking sector.

What was the ICB's mandate?

The ICB was set up by the Government in June 2010 to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition. High on the list of issues was the structural separation of different types of banking activity.

Following an Interim Report in April this year, the ICB released its Final Report on 12 September.

What main problems did ICB identify?

Structural risks of universal banks

Those banks that combine domestic retail services with global wholesale and investment banking operations can cause public policy concerns. Currently, it is difficult and costly to deal with these banks if they get into trouble. The absence of an orderly resolution process can:

  • cause contagion and knee-jerk shock reactions throughout the banking system;
  • threaten the continuity of essential banking services; and
  • lead to a large taxpayer liability.

Retail banking is itself exposed to external financial shocks that can arise from the global nature of wholesale/investment banking.

Risk management and financial resources

The financial crisis of 2008 showed that banks had too little equity capital for the risks they were running. Leverage ratios of assets to equity capital had ballooned to around 40 times and, instead of restricting leverage, the regulatory system put limits on ratios of capital to Risk Weighted Assets (RWAs) – and the risk weightings themselves were flawed. On top of that, once the thin layer of equity capital had gone, the banks had proven to be poor at absorbing losses. The resulting lack of loss-absorbing capacity led to the ultimate decisions of many governments to make tax-holders bear the costs of bank failure, through fear of the consequences of insolvency.


Competition has long been an issue in UK retail banking and the crisis has only made the situation worse. Currently, the four largest banks hold 77% of personal current accounts and 85% of SME current accounts. There are difficulties in customers switching accounts and a lack of transparency about banking services on offer.

What are the key recommendations?

The recommendations in the report aim to:

  • reduce the likelihood and impact of future crises;
  • keep the efficient flow of credit; and
  • preserve a functioning payment system and capital certainty and liquidity for the retail and SME market.

The recommendations cover the three areas of concern and would:

  • require banks to ring-fence their high street banking businesses from their "casino" investment divisions;
  • impose higher capital requirements and improved loss-absorbing capacity; and
  • improve transparency and ease of account-switching to improve competition.

What is the ring fence?

The retail ring fence will isolate, in a separate corporate entity, banking activities that have to be continually available, to ensure:

  • the provision of the services is not threatened because of activities incidental to it; and
  • the services can still be provided if the bank fails, without government support.

What's in the ring fence?

Some services will be required to be within the ring fence (specifically deposit-taking and lending business to individuals and SMEs).

What can't be in the ring fence? Other services will not be allowed within the ring fence (any services that involve the bank in taking risks and which are not integral to the provision of the ring-fenced services, and any other services that would make resolution more costly or threaten the objectives of the ring-fence).

Other services could fall within or outside the ring-fence as appropriate.

The ICB did not go so far as to require banks providing ring-fenced activities to be completely independent of banks or other entities providing other banking services. But it has said a ring-fenced bank should be easily isolated from its corporate group if necessary, and that its relationships with other entities in its group should be on a third party basis. The ICB estimates that up to £2 trillion of assets could fall within the ring fence.

What capital changes does the Report recommend?

The ICB says retail banks should have equity-to-RWA ratio of at least 10% if they have a 3% or more ratio of RWA to UK GDP. There would be a sliding scale for those with ratios of RWA to GDP of between 1% and 3%. There would be a Tier 1 leverage ratio of at least 3% (calibrated against Tier 1 capital) for all banks.

Additionally, retail and other activities of large ring-fenced banks and UK-headquartered Global Systemically Important Banks (G-SIBs) should both have primary loss-absorbing capacity of at least 17-20%.

There would also be powers for resolution authorities to impose losses on "bail-in" bonds, and all insured depositors should rank ahead of most other creditors in insolvency.

Why isn't Basel III good enough?

Basel III requires banks to have equity capital of at least 7% of RWA by 2019 with a possible extra 2.5% for G-SIBs and a further 1% for banks whose systemic importance grows yet more. There is also a proposal to limit leverage to 33 times. There are also specific proposals calling for banks to hold more liquid assets to make them better able to withstand any problems in accessing liquidity in the markets.

While recognizing that these would be important steps, the ICB does not believe that they go far enough for several reasons. One concern is that, although an increase in equity requirements across the board internationally would help increase confidence, unilateral action by one country may result in undesirable regulatory arbitrage. The ICB also feels the leverage cap of 33 is arguably too lax, particularly for systemically important banks. Perhaps its most persuasive argument is that it is tasked with focusing on banks with national (rather than international) systemic importance. It also notes that the loss-absorbency debate is ongoing internationally.

What recommendations will improve competition?

Divestiture: The ICB recommends the Government ensure in the Lloyds Banking Group divestiture that what is divested can become a strong challenger bank with, for instance, a solid funding position.

Easier account switching: To smooth the process of current account switching the ICB recommends introducing a free redirection service which transfers current accounts within seven working days and provides redirection for more than a year.

Product transparency: Further, it says transparency across all retail banking products should be improved, for example by the disclosure of more information about prices and by making current accounts more comparable.

The ICB has not recommended an immediate market investigation reference to the Competition Commission, but says one may be needed depending on the next few years’ developments.

When is all this supposed to happen?

The ICB encourages the Government to support its recommendations and to quickly pass reform measures. Banks themselves should be strongly encouraged to carry out any operational changes as soon as possible. However, recognising the increased capital demands in particular, the ICB says all changes should be completed, at the latest, by the start of 2019, in line with Basel III. But it is likely to have an impact sooner. FSA has promised to revise its proposals for Recovery and Resolution Plans in the light of the Final Report.

Who will this affect the most?

The real effects will only become clear once the Government decides what will pass into law. Industry's response has been cautious, although the Building Societies Association has commented that the Report is a vote of confidence in the building society model.

However, on the face of it, the biggest structural changes would appear to be faced by Barclays and RBS, whose investment/wholesale banking activities are large and would not be permitted within the ring fence. The expense of this structural reform for the largest UK universal banks and the higher captial requirements placed on them and the other large banks will perhaps produce more of a competitive field and allow smaller banks to challenge their dominance. But at what cost to the banking industry and its customers?