by Mark Johnston
New Banking Reforms.
On 14 June 2012 the Government published its White Paper ‘Banking reform: delivering stability and supporting a sustainable economy’, which sets out the Government’s detailed proposals for implementing the recommendations of the Independent Commission on Banking (ICB), to fundamentally reform the structure of banking in the UK.
George Osborne, UK chancellor of the exchequer, explained the government’s intentions through the new banking reform and said: “High street banking will be ring fenced so that taxpayers are better protected when things go wrong. We will be able to bail in creditors when a bank fails rather than turning to the public purse”.
Mark Hoban, financial secretary to the UK Treasury,suggested that: “The ringfence will not stop a bank failing, but it will insulate the deposits of families and businesses and, if a bank does fail, these essential parts of the banking system can continue”.
Andrew Bailey, head of the Prudential Business Unit at the Financial Services Authority, has said new rules that come into force next year will put “the emphasis on economic well-being as an ultimate goal” of bank regulation.
Financial experts have outlined myths propagated by the banking lobby. The first was that reform, principally the demand for larger loss-absorbing capital buffers, was a choice “between safety and growth”. “The banking lobby would have us believe that higher capital requirements and lower leverage will damage economic growth and retard the recovery,” he said. “Bankers have exploited this fear.”
Another myth was that governments cannot afford to over-regulate for the risk of losing financial centres. However, experts said: “In a world of increased risk awareness, letting your banks off the capital hook will likely damage not enhance their ability to compete.”
The banking reform proposals, which was aimed at shaking up British banking, seem to opt for ring fencing rather than a complete separation of retail banking from riskier investment banking divisions.
The Morgan Stanley report follows comments from members of the Financial Policy Committee, suggesting that banks may face new caps on their lending.
The authors of the report believe that British banks could have to raise more than £20 billion in additional capital if regulators move ahead with threats to increase the size of the buffer lenders must hold against their mortgage books.
However, other experts believe that this could be bad news for the economy and goes against the grain of the Funding for Lending scheme. Although longer term they think that this could possibly make banks safer, however, it would result in increased capital demands and could lead to significant tightening in credit conditions with an impact on the economy,” the analysts said.
Increasing the amount of capital held against mortgage assets would be one way for policymakers to prevent a new credit and property bubble from growing, but is likely to prove controversial as it could make it harder for home buyers to secure loans.
Stephen Hester, chief executive of the Royal Bank of Scotland (RBS) has suggested that “bank reform will take a generation”. A sentiment which it appears is shared by many.
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