Banks will test the limits unless they are incentivised not to, writes Tyrie in this FT opinion piece.
The UK government will shortly publish its Banking Reform Bill, giving effect to the recommendations of the Independent Commission on Banking, chaired by Sir John Vickers, to create a ringfence around the industry’s core retail activities.
The Parliamentary Commission on Banking Standards [chaired by Tyrie] supports the creation of this ringfence. However, in our report scrutinising the draft legislation, the commission also concluded that without significant changes it may well not achieve its objectives. The ringfence must be “electrified” if it is to stand a better chance of success – in other words, if the banks test the ringfence too much, they will get a shock. We therefore recommended a reserve power for full separation, an approach Sir John himself endorsed in evidence to the commission this month.
The regulators, too, have told the commission they want electrification. And they have come forward with proposals to give it practical effect. The banks, on the other hand, do not want electrification. They seem to be the only ones. The lobbying campaign against this proposal predictably started the moment our report was published – just as it did when the ICB first suggested introducing a ringfence...
Electrification would reduce the uncertainty that would inevitably accompany endless gaming of the rules. As Sir John made clear, the only way this proposal will increase uncertainty is if the banks intend to try to get through the ringfence.
Nor, as has been alleged, would the reserve power be applied arbitrarily. It would be subject to independent scrutiny before each case of its use... Electrification is therefore essential to ensure that the banks comply not just with the rules of the ringfence but also with the spirit.
In addition to enhancing financial stability, we also believe the ringfence can have benefits for banking standards. This is not something that was in the ICB’s terms of reference; but, following two years of scandals across the banking industry, it is central to our work.
© Financial Times
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