Monday, April 18, 2011

Vickers’ Reform Plans to Make UK Banks Safe and Competitive

FT: Lloyds Lashes Out at Vickers Report; Ringfenced But Game’s Far From Up; Vickers to Propose More Competition for Banks
Economist: Commission Accomplished
Telegraph: Sir John Vickers Unveils Radical Shake-up of Banking Industry Regulation; The Quiet Revolution for British Banking

Last summer, the UK government established the Independent Commission on Banking (ICB) and asked the ICB to provide banking reform plans to enhance stability of the UK financial system and improve competition. The ICB, chaired by Sir John Vickers, a former chief economist at the Bank of England, published its interim report on April 11th. After the release of the report, bank shares rose since its recommendations were less radical than expected. Notably, the report did not recommend an option of requiring banks to completely separate their retail banking units from investment banking units.

Mainly, the ICB’s report suggests three measures. First, the report recommends that banks’ retail banking units be ring-fenced from other units so that retail units can keep functioning in a financial crisis. Second, as a measure to increase banks’ ability to absorb losses, the report recommends that banks hold a core Tier 1 capital ratio of at least 10 percent, higher than the minimum requirement of 7 percent set by Basel III. Lastly, in order to enhance competition in the retail banking market, the report recommends that Lloyds Banking Group reduce its market share of current accounts by selling more branches. Lloyds’ market share rose up to almost 30 percent after the purchase of HBOS during the financial crisis. As a condition for receiving state aid, Lloyds has already begun selling its 600 branches, but the report did not specify how many additional branches Lloyds would be required to sell.

Critics say that the ICB “bottled it” and its recommendations were timid. They point out that the ICB rejected options of formally separating banks’ retail and investment banking units and unwinding of the merger between Lloyds and HBOS. Also, the ICB did not provide any recommendations regarding caps on bankers’ bonuses. However, Sir Vickers claims that the report’s reform options are “very far-reaching” and would “make a world of difference to UK retail banking.”

The ICB’s final report is due in September. In the meantime, the ICB will receive comments on their recommendations from the public.

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