FEW casual observers would use the term ‘electrifying’ in the context of regulatory reform.
But that is precisely the word on everyone’s lips in the wake of the latest development in the UK Government’s proposals for banking reform.
On February 4 HM Treasury published the Banking Reform Bill.
This represents the latest step in the UK Government’s plans to reform the banking sector and follows on from the recommendations of the Independent Commission on Banking (ICB) in 2011 and HM Treasury’s White Paper and draft Bill issued in 2012.
Many of the themes contained within the new Bill are consistent with those earlier publications.
A key focus remains on trying to ensure that taxpayers will never again be called upon to bail the banks out.
However, a key development within the Banking Reform Bill is the inclusion of a recommendation made by the Parliamentary Commission on Banking Standards in December 2012 that the ring-fence between the core retail operations and the higher risk investment banking-style operations should be ‘electrified’.
The Commission suggested that banks could not be trusted and that strong disincentives need to be put in place to discourage banks from ignoring the rules.
Under the latest proposals, the new prudential regulator in the UK would be given powers to enforce full separation of retail and non-retail banking operations if the ring fence is not adequately effected.
This development represents a significant ‘U-turn’ by Chancellor George Osborne, who had previously cautioned the Commission against “unpicking the consensus” on whether there needed to be a complete separation of retail and investment banking operations.
Whilst many will welcome a further tightening of the proposals for reform, such measures have not met with universal approval. The Chief Executive of the British Bankers’ Association described them as ‘good politics but bad business’. In particular, there are concerns that it will be even more difficult for banks to lend money and will create increased uncertainty for investors in banks.
The effectiveness of the ring-fencing proposals and the impact on banks business models, together with the wider economy, remains unproven. In the case of Northern Rock, for example, it is difficult to see how the ring fencing proposals would have made any difference to the ultimate outcome. The debate around the reform proposals will inevitably continue as the Bill passes through the next stages of the legislative process.
This debate may not be electrifying, but there may be some shocks to the system.
