Today, the Independent Banking Commission published its first issues paper, seeking views on broad options for new structural and non-structural measures to promote competition and stability in the banking sector. This briefing summarises the options for reform and questions posed. A more detailed briefing which considers the issues will be published in due course.

In June 2010 the Commission was established to make recommendations with regard to:

  • structural measures to reform the banking system and promote stability and competition, including the separation of retail and investment banking functions; and
  • non-structural measures to promote stability and competition in banking for the benefit of consumers and businesses.

The purpose of the issues paper is to seek views on questions that the Commission's recommendations will address in due course.

Options for reform

The options for reform in relation to the structure of banks are as follows:

  • Separation of retail and investment banking activities
  • Narrow banking and limited purpose banking - where retail deposits would be 100% backed by "safe, liquid assets" (eg, government bonds of short-to-medium maturity) and isolated from other banking activities (eg, lending).
  • Limits on proprietary trading and investing - retail banking would be allowed to be combined with investment banking activities that do not entail proprietary trading. This option has been recently incorporated into the US Dodd-Frank Act, where proprietary trading and investing activities of deposit-taking institutions are restricted, including with regard to their participation in hedge funds and private equity business (known as the 'Volcker Rule').
  • Structural separability - where systemically important banks would be readily separable if circumstances so require. For example, a bank would be allowed to combine investment banking with retail banking, provided there was a clear mechanism for their separation if the investment banking division were to get into difficulty. Two mechanisms which enable such contingent separation are "living wills" and resolution schemes.
  • Contingent capital - where the capital structures of banks would automatically convert, in full or part, to equity or preferred stock, if a predefined threshold (eg, in terms of capital ratios) was met.
  • Structure-related surcharges - eg, in the form of higher capital and liquidity requirements or taxes, which could apply to banks depending on their size and structure.

There are two mooted options for reform in relation to the structure of markets, namely:

  • Measures to reduce market concentration - eg, making the legislative amendment introduced in October 2008 which makes “the stability of the UK financial system” a ground on which the Secretary of State for Business can intervene in the normal operation of merger law, non-discretionary (the Dodd-Frank Act prohibits mergers that would result in a bank having more than 10% of the total liabilities of the US banking system); or reducing barriers to entry, for example through enhanced current account portability, or increased access to payment systems infrastructure.
  • Market infrastructure reform - such as in relation to the processes by which financial securities are traded, for example encouraging securities to be traded through a central counterparty, rather than bilaterally over-the-counter.

The paper emphases that the options are not exhaustive and that the Commission has not yet moved towards any particular recommendations.

It is interesting to note that the Commission states that it will pay close attention to the "shadow banking sector" (in which it includes hedge funds), on the basis that reforms of the banking sector would be diminished if the issues migrated to the "shadow banking sector". It is however not clear what the Commission envisages in this regard.

Further, the Commission states that it is mindful of international issues, for example ongoing international regulatory reform initiatives, foreign operations of UK banks, and the role of foreign-owned banks operating in the UK.

Key questions

The key questions that the Commission has posed can be summarised as follows:

  1. Are there other options for reform that should be considered - should any options be ruled out?
  2. Which of the reform options deserve further development and analysis?
  3. What impact would the options have on other regulatory reform initiatives (eg, on capital and liquidity requirements)?
  4. What are the costs and benefits of the options?
  5. What are the implications on the "shadow banking sector"?

Next steps (including financial services regulatory architecture reforms)


  • 18 October - deadline for responses to HM Treasury's consultation on reforms to UK financial services regulatory architecture (click here to access our briefing)
  • 15 November - deadline for responses to Commission's issues paper


  • Early 2011 detailed proposals on core parts of draft legislation reforming UK financial services regulatory architecture to be published for consultation
  • Spring - Commission to publish detailed analysis of leading reform options
  • End of September - Commission to make final recommendations


  • 1 January - full implementation of new UK financial services regulatory architecture