Big questions for Vickers bank inquiry says senior member of the Treasury Select Committee

Friday, 2 September, 2011

David Ruffley MP and his colleagues on the Treasury Committee have called on the Independent Commission on Banking to address a number of concerns that have been raised about its proposal to ring-fence retail banking- including its effect on the competitiveness of UK banking and the cost of credit to business:

'A retail ring fence would entail a huge change to the structure of the banking sector in the UK.'

'It is crucially important that the debate on that reform does not take place behind closed doors. It is equally important that all the information and arguments needed in order to assess the reforms are published by the Committee.'

'To implement the ring fence without having done so would be a leap in the dark. Our long term prosperity depends on getting this right. That is why, in his final report Sir John must set out all the detail on the alternative proposals for all to see.'

'The Committee has examined this and concluded that in a number of areas further consideration and information is required. Only when this is available can the Vickers proposals command the support, not only of the banking industry, but of everyone who depends on it.'

The Select Committee has also asked the Independent Commission on Banking (ICB) to look at how corporate governance in banks could be improved to enhance the stability of the financial system in its final report due out in September.

The committee said:

'The failure to address the issue of corporate governance was a serious omission in the ICB's interim report. It must be tackled head-on in the final report.'

The MPs urge the major banks to place any objections or concerns they have about the ICB proposals fully in to the public domain. A final ICB report based on private discussion and agreement with the banks rather than rigorous public scrutiny would lack public credibility and acceptability, according to the MPs.

The committee added:

'When the banks appeared before us, they articulated important concerns about the Vickers proposals. The banks warned us that the ICB's structural reform options could potentially be costly. They claimed that a retail ring fence would contribute little to increased financial stability and may inadvertently increase moral hazard and risk-taking.'

'These are important objections and we believe Sir John needs to come out and demonstrate that his proposals would not have the negative or unintended consequences that his critics assert.'

The Select Committee is also concerned that the option of full structural separation of retail and investment banking has not received sufficient analysis. The Report calls on the ICB to provide further details as to the costs and benefits of this reform option and why it decided against full separation when proposing ring-fencing as the 'lead option' in its interim report.

The committee also said:

'Full structural separation of retail and investment banking was dispatched in just one page of the interim report. This is not a convincing demonstration that full consideration has been given to this option.'

The calls come in a Report from the Treasury Committee that outlines a number of key questions which should be answered by the ICB and the banks about the impact of its proposals on the UK economy and the banking sector.

Among the key questions the Committee poses:

- There is concern about the impact of some of the structural reform options on the competitiveness of the UK economy as well as on the cost to credit to business. The ICB needs to provide us with more detailed analysis of how the impact on the competitiveness of the UK economy compares between the full separation and the retail ring–fence options as well as the impact of these two reform options on the cost of credit to business.

- The ICB proposals for a ring–fence as yet contain little detail, making it difficult to evaluate the pros and cons of a narrow versus a broad ring–fence. We urge the ICB to come up with a more detailed analysis of the costs and benefits of various forms of ring–fence and with robust estimates of the cost to the banks and the social costs and attempt to secure some measure of agreement with the banks on these figures.

- Some banks claim that a retail ring–fence will add little to measures already in train to promote financial stability being undertaken both internationally and in the UK. These include a higher capital levels, tighter liquidity requirements, resolution plans, contingent capital and bail–ins. The ICB needs to explain why these measures are insufficient and a retail ring–fence is essential. It would also be useful if the ICB could explain the inter-relationship between ring-fencing and the other measures, and indicate some of the trade-offs-eg how much more capital would be required in the absence of a ring-fence.

- One of the justifications for the ring–fence appears to be uncertainty that other measures to make banks readily resolvable would be effective in a crisis. We urge the ICB to outline in greater detail its concerns about the effectiveness of resolution plans. Furthermore, the ICB should explain whether, if it at some point, it became clear that banks had become readily resolvable, the ring-fence requirement should be dropped.

- In their Interim Report, the ICB state that, at the present time, they do not plan an approach which would, in the language of the ICB, be laisser-faire about structure and seek to achieve financial stability by very high capital requirements across the board. The ICB must explain why they do not favour this option and how much they assess capital requirements would have had to rise by were this option chosen.

- Full structural separation is not at the present time the ICB's lead option. This thin treatment by the ICB of full separation, covered in just one page, is not convincing as a demonstration that full consideration has been given to this option. The ICB must explain in greater detail why they came to this decision.