The much-awaited final report from the Independent Commission on Banking was published on Monday 12 September 2011 to a great deal of fanfare, making it the lead story on most news channels and stealing the headlines in the national newspapers the next day.
The main recommendation of the report, that the retail and small business banking operations of banks be “ringfenced” from their riskier investment operations, had been flagged in advance in the ICB’s interim report and was not unexpected. The idea behind this is that it is meant to minimise the prospect of tax payers having to meet the cost of the next crisis in the banking industry by protecting retail deposits in the hands of the banks. In view of the continuing economic crisis, banks will have until 2019 to implement the detail of the recommendations.
Is eight years too long, or not long enough? Sceptics suggest that if the economy makes a bounce back within, say, five years, are we not likely to hear the arguments that implementing the detail might stall that recovery? If everything is rosy again with the economy, do we really need the change after all? Consumer groups are calling for the “minor” recommendations of the report - such as a speedier means of switching your current account from one bank to another – to be brought forward in the immediate term. Truth be told, banks have already made significant progress along this road, though IT constraints seem to be the remaining hurdle.
The big question is – will the ringfencing actually work? We’ve all heard or read in the last few days of the impending sovereign debt crisis looming in the Eurozone, with Greece almost certain to default – possibly as early as the end of September. Banks across Europe, including those in the UK have huge exposures to sovereign debt. We face the real prospect in the UK of the Bank of England having to bail out the banking sector all over again, potentially taking us into a double-dip recession. If ring fencing had already been in place, would it have made a blind bit of difference?
And who bears the cost? Reports are already filtering out in the press of the likely costs of implementing the report – touted at £7bn a year – being passed on to retail and small business banking customers. New or increased bank charges are considered likely, as is the increased cost of mortgages. Financial experts are already predicting that low fixed-rate mortgages are set to disappear, even with the underlying rates which heavily influence mortgage rates at historic lows. Free banking for retail customers is already edging towards being a thing of the past, with monthly fees for “reward” accounts becoming the norm.
Increased competition is seen by the report as a “good thing”. New entrants in the retail space such as Virgin Money and Tesco Bank will make an impact, but the scope for innovation in retail banking products is limited. "Vanilla banking" is more likely to be the norm, particularly with the FSA set to take a keener interest in product development. Better customer service is far more likely to make a difference to our lives. Losing market share may well encourage the current big four to improve their offering, or at least try harder to address the public perception of their offering which has taken a real battering.