The ICB Report versus the Globe

by Mark Johnston

Monday, 11th April, 2011 saw the Independent Commission on Banking reveal their preliminary report on recommendations on shielding depositors from higher risk banking activities.

How this is achieved is a point of some consideration across the globe but there is no questions that the objective is sound and the right thing to do.  The UK government appears to be following the US in regulations.  The Dodd-Frank Act set out certain reforms within the USA that the UK is only now only making suggestions to follow.  Specifically, there is a section of regulation that prohibits the lender or deposit taking bank from taking markets risks with their own money, this is known as the Volcker rule.

This rule goes a way to cap the growth of the largest banks, limits banks and deposit takers from taking on too many hedge funds and endeavors into private equity and derivate trading.  The recent report and suggestions don’t quite go as far as to cap growth or recommend structure changes within any organization and continues to allow banks and lenders to maintain their size and operations.  But they are required, as expected and is prudent, to retain more capital incase of defaulting loans. 

What the ICB have suggested is that, in an effort to mimic some of the Dodd-Frank Act, the banks could ring fence or create a firewall of capital around deposit taking activities or functions.  This would save breaking up structures within the organization, something market experts feared would happen. 

Within the UK, proprietary trading is relatively small and any copy of the Volcker rules would become insignificant.  What is conceded is that the conflict of interest where banks and lenders trade on their own behalf and on the behalf of their customers has not been addresses as it should perhaps be.

Within the European Union, the European Commission new rules known as Basel III but they have shunned the ring fencing option favored by the British.  Thankfully the French and Germans have aligned with UK regulatory thoughts and not required banks and lenders to split their retail and investment operations and significantly change their structure. 

Switzerland is taking the lead and is taking a fairly tough line with their banks and lenders.  Above the agreed Basel III minimum by 7 per cent, the Swiss have required their banks to hold more capital in reserves by 2013. 

By 2018, the Swiss have asked that UBS and Credit Suisse hold at least 10 per cent and a further 9 per cent as contingency, convertible into bonds.  This is way above the recommended 10 per cent that the UK ICB has recommended. The Swiss have also suggested structure changes to their banks to ensure functions, such as payment systems, will continue should the worst happen again.  This mirrors a recommendation from the ICB.

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