Britain’s banks and business bodies have demanded that the Independent Commission on Banking produce a full analysis of its proposal to ring-fence retail deposits amid growing fears that the change will increase costs and hamper economic recovery.
In submissions to the commission ahead of yesterday’s deadline, several banks called on it to justify a ring-fence and 10 per cent minimum capital requirement within the retail business by showing how the benefits would outweigh the costs. The CBI is also putting pressure on the commission, saying that it had not made a “sufficiently strong” case for its proposed change.
The CBI’s Director-General John Cridland said: “The commission should not proceed with the idea unless it stands up to a rigorous cost-benefit analysis. These plans could result in riskier lending within the ring-fence and cause disruption to banks and businesses outside the ring-fence in the event of a crisis.”
The ICB’s plan, welcomed as moderate when mooted in its April interim report but increasingly seen as a radical change that would make Britain unique in the world, is to make retail banks well-capitalised and surrounded by a firewall.
The reform would help to prevent taxpayer-funded bailouts in future banking failures as the Government would not have to step in to save individual depositors, the ICB believes. In the event of a failure, the investment bank would be allowed to collapse, with sophisticated equity investors and those who provide it with funding taking the financial hit.
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While all Britain’s leading banks have submitted ideas for how a ring-fence could be practically achieved, there is a simmering anger in the City about the damage the ICB’s proposals have done to bank share prices in recent months.
Senior bankers are also frustrated that the commission gave no details in April, instead asking banks for ways to achieve the partial separation of retail and investment banking.
The ICB will publish submissions that it has received from banks and other interested parties in the next few weeks and will issue its final report on September 12. George Osborne must then decide whether to implement its proposals.
While there is still a political will to be tough on banks after the financial crisis, there is a view that the Conservatives have become open in recent weeks to warnings from the banks that the ring-fence would be very expensive and choke off lending to businesses.