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Independent Commission on Banking

In its Final Report, published on 12 September 2011, the Independent Commission on Banking (ICB) proposed radical changes to the way banks authorised in the UK structure themselves and manage their retail banking activities. On 14 June the Government published a White Paper – Banking reform: Delivering stability and supporting a sustainable economy – which outlined its plans to take forward the ICB recommendations. Once fully implemented, the recommendations will have a major impact on UK domestic banking and UK universal banks’ role in global investment banking markets.

The recommendations, along with the European Capital Requirements Regulation, higher capital requirements for trading activities, the G20’s agenda for OTC derivatives and the European recovery and resolution framework (especially its extensive bail‑in provisions), will lead some mid-sized and most large banks to reassess what business they take on, their growth strategy, capital structure and legal entity arrangements.

The Government is seeking views on the proposals outlined in the White Paper, with responses due by 6 September 2012. The next step will be the publication of a draft Bill in autumn, followed by the introduction of necessary legislation as soon as Parliamentary time allows.

Key proposals in the ICB White Paper

UK retail ring-fencing
The Government proposes to separate retail banking operations from investment/wholesale banking functions, effectively creating a ring-fence around personal and SME deposits and overdrafts, which it sees as critical banking services whose temporary interruption would have a significant direct impact on the domestic economy. Such ring-fenced banks would be prohibited from engaging in international wholesale/investment banking, but may provide ‘simple’ derivative products to clients. Banks and building societies with deposits of less than £25bn are to be exempt from the ring-fencing requirement.

The White Paper calls for the largest ring-fenced UK retail banks to be required to hold minimum equity capital equivalent to 10% of their risk-weighted assets (RWAs). They will also have to hold capital equivalent to an additional 7-10% of RWAs in the form of primary loss-absorbing capital (PLAC). Those overseas operations of UK-headquartered G-SIBs that do not pose a risk to UK/EEA financial stability will be exempt from the PLAC requirement.

Bail-in and depositor preference
The White Paper recommends that the UK resolution authority should have a statutory power of bail-in (to recapitalise banks in resolution). Recently published EU Recovery and Resolution Directive (RRD) proposal included substantial bail-in provisions, and the White Paper indicated that the UK Government expects ‘to implement bail-in through the transposition of this Directive’. The White Paper also outlines the Government’s intention to introduce ‘depositor preference’ for deposits insured by the Financial Services Compensation Scheme (FSCS) up to the insurance limit.

The ICB called for improved processes for customers to switch accounts and greater transparency so that customers can compare prices. The proposals may also create opportunities for non-UK banks to compete in the retail banking market here, with the Government indicating that the regulators may reduce capital requirements for new entrants, provided they are resolvable.

Structural reform
Under ring-fencing, banks will be required to create separate standalone subsidiaries with their own governance arrangements. There will be limits on their financial and operational links with investment or wholesale banking entities in the wider group. The White Paper has allowed flexibility over the positioning of other activities such as the corporate loan book.

Challenges and imperatives
The Government has stated in the White Paper that it remains strongly committed to implementing the ICB’s proposals. However, whilst it does provide clarity in some areas, many important questions have been left unanswered, with the Government indicating that the final, detailed shape of the proposals will be developed over a longer period of time. We expect the primary legislation that will follow in autumn to be high-level, meaning banks will need to wait for secondary legislation or in some cases for the rules to be developed by the future Prudential Regulation Authority (PRA).

The recommendations contained within the ICB White Paper are also part of a wider regulatory response to the financial crisis, and the relative impact on UK banks depends on the reaction of regulators elsewhere. However, institutions should begin high-level planning and strategic thinking on the ICB’s proposals now:

  • The ICB's proposals will have a material impact on some banks' strategies. Sufficient significant detail is already available to allow institutions to identify probable results and narrow their options.
  • Working through and beginning to quantify these impacts to discuss possible outcomes internally is essential.
  • Although the implementation timetable stretches to 2019, evaluating options and designing and implementing the ring-fence will for some entail significant operational complexity, and banks should allow sufficient time to work through the detail. The market will also price in expectations well ahead of the deadline. It is possible to construct and position the ring-fence as a vehicle or legal entity well before knowing precisely which of the permitted activities it will contain.
  • To the extent that the ICB causes banks to rethink strategic plans, there may be commercial advantage in being an early mover.


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  • Independent Commission on Banking
    ICB Final Report Recommendations

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