by Mark Johnston
The Independent Commission on Banking published their initial recommendations the other week but there are still some key questions left unanswered. A consultation period between the UK Government and the industry will be carried out over the course of a few months to gauge feeling and ratify the proposals. What are the key questions for the industry and what will the impacts be for you and your lender or bank?
Ring fencing. In an effort to make the industry a little safer, the commission has recommended that the industry ring fence all retail divisions. What is not clear is where the lines are drawn and what is exactly defined by this recommendation. What is clear is that all retail deposits are included, covering current accounts, savings accounts and investments. Within the consultation period, no doubt further clarification on where the lines are drawn will be sought.
There is a requirement for the industry to ensure basic banking functions running, even in the event of a bank failure or further crisis situations. They are required to keep a minimum of 10 per cent core tier one capital.
The price of capital for the banks will be driven up by the potential to include other assets in the proposals, which could prompt business leaders to sell off whole business lines. These other assets include mortgages, personal loans, credit cards and wealth operations. This proposal may very well see the number of lenders in the mortgage market increase and competition increase, potentially leading to better mortgage rated and offers. A further question posed on this ring fencing proposal is how “hard” the fence should be and whether there is a possibility for cross over financing of other business units. I would suggest that the fence is intended to keep good money away for poor lending and secure at least a core of the industry.
Lloyds are not happy. The Lloyds Banking Group are in the process of selling 600 branches and a 4.6 per cent share in their and it has been suggested that this would not provide a viable new competitor in the industry and that the group will need to go further. The suggestion is that the bank will have to sell another 200-400 branches as a conservative estimate and possibly 1000 branches at the upper end. Something Horta-Osorio, Chief Executive, has planned for but had hoped would not be needed.
Cost and the impact on borrowers. The industry has suggested that ring fencing alone will add another £4 billion to their overheads in capital and operational costs. The commission is unwilling to be drawn on this and that it depends entirely on how the banks choose to implement the proposals. History has taught us to be warned when the industry has to pay for new regulatory changes as these additional costs are often pushed onto the customer in one form or another.
Timescales are a little vague but what is definitive is that the industry will change over the next few years.
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