Friday, September 21, 2012

Parliament Considers UK Draft Legislation Implementing Ring-Fencing of Retail from Investment Banking in Britain's Answer to Volcker Rule

A joint UK Parliamentary Committee has begun hearing evidence on draft legislation implementing the Vickers Commission recommendations that would ring-fence banks taking retail deposits from investment banks in the same banking group as Britain's answer to the Volcker Rule. The legisaltion would ring-fence vital banking services on which households and small and medium-sized busonesses  depend, keeping them separate from wholesale and investment banking activities. This would more effectively insulate them from problems elsewhere in the global financial system and make banks easier to resolve without taxpayer support. It would also curtail implicit government guarantees, reducing the risk to the public finances and making it less likely that banks will run excessive risks in the first place. Improving resolvability of banks through structural reform is in keeping with international initiatives to make it easier to deal with failing banks. Structural complexity has been identified by the Financial Stability Board as one of the most important barriers to successful bank resolution.

The fence should be flexible in location, said the Government, but of sufficient height to ensure effective legal, operational and economic separation between entities. Under the legislation, there be a set of mandated services within ring-fenced banks consisting of retail and SME deposits and overdrafts and a set of wholesale and investment banking services should be prohibited from the ring-fenced bank in order to meet the objectives of the policy. The ring-fenced bank should be allowed to conduct ancillary activities to support the provision of its core functions; and should be legally and operationally independent from the rest of its corporate group. Also, economically, the ring-fenced bank should not be dependent for its liquidity and solvency on the financial health of the rest of its group.