Banking reforms proposed

The Independent Commission on Banking ("ICB") has published a report proposing extensive reforms of the banking structure within the UK. The recommendations, which have received far reaching support, state that UK banks should ring-fence their retail arm from their investment banking. The proposals, if accepted, are to be implemented in 2019 and would require the banks to have greater financial reserves to deal with any future economic crisis. The ICB recommend that at least 10% of domestic retail assets, in top quality form, should be reserved, which is in excess of the 7% recommended by International Basel Committee on Banking Supervision.

In addition, the report says the larger banks should have a safety net of between 17% and 20% of assets of the highest quality, that could be easily liquidated in the event of a crisis. Such reforms are particularly timely, given the recent announcement by UBS that a rogue trader has cost the Swiss bank an estimated $2bn.

In light of the banking crisis and the revelations of UBS, it can be seen that there are compelling arguments for banking reform. However, a balance needs to be struck to ensure that any reforms do not stop corporate lending and stifle growth. The business lobby group CBI ("Confederation of British Industry") has raised concern that the reforms will not be good for business, and argues that the capital requirements of UK banks, being in excess of international proposals, will mean that the cost of borrowing on the UK markets will be higher than overseas, and will put UK companies at a disadvantage. Additionally, concern has been raised that the reforms will inevitably lead to an increase in the cost of lending to consumers. The level of increase is unknown, but any significant rise in cost or the slowing of lending could lead to stifling of the economic recovery. The cost of implementing these reforms has also raised concern. The ICB noted that the cost could be in the region of £4bn and £7bn to British banks, with the fear that this cost will be passed on to customers.

There is also concern that the reforms will have a detrimental impact on the UK banks' international competitiveness, with some holding the view that regulating the UK banks may make some banks leave the UK for countries that are less heavily regulated. While it is clear that there is an overriding need to reform the banking system and to create a robust and safe banking environment, a balance needs to be struck to ensure that the reforms do not unintentionally destabilise the economic recovery.

For more details, contact Rebecca Dury on (0)1392 333941 or r.dury@ashfords.co.uk

Ashfords LLP is Authorised and Regulated by the Solicitors Regulation Authority. The information in this note is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.