Banking reform: towards the right structure - Parliamentary Commission on Banking Standards Contents

Conclusions and recommendations

Reinforcing the ring-fence

1.  The Commission welcomes the Government's acceptance of the principle that its proposed framework for ring-fencing requires reinforcement. In this chapter, we consider progress in relation to our main suggestions with this aim in mind. (Paragraph 6)

The first reserve power

2.  The Commission finds it surprising that the Chief Executive of the British Bankers' Association should adopt a policy position which has no public support from the major banks most directly affected by the ring-fence. (Paragraph 16)

3.  The Commission sees no merit in the proposition that the first reserve power will create uncertainty for banks or put at risk their attempts to raise funds for lending. That power will be a source of uncertainty only for those minded to take actions that conflict with the objectives of the ring-fence. For all other banks, for regulators, for Parliament and the public, it will be a source of greater certainty about the effectiveness of the ring-fence. The Commission welcomes the Government's commitment to amend the Bill to provide for a reserve power to break-up a bank that seeks to flout the ring-fence. (Paragraph 17)

4.  We consider it important that the regulator's powers to break-up a bank should be exercisable only after consideration of the regulator's relationship with the bank by an independent reviewer. It is also important that the reviewer should be independent of Government. We welcome the Financial Secretary to the Treasury's commitment to give careful consideration to our specific proposals on the conditions on the exercise of this power. Amendments J and K in the Appendix are intended to provide an early opportunity for the House of Commons to consider further this reserve power and the appropriate limits upon its exercise. We would also envisage a specific timetable relating to the exercise of the powers, to be determined at the outset. (Paragraph 18)

5.  We recommend that the Government make explicit provision in the Bill to enable the regulator to require a bank to divest itself of a specified division or set of activities which would fall short of the full divestment required under the first reserve power. We envisage that this power would be subject to limits on its exercise similar to those of the first reserve power. (Paragraph 19)

The independent review mechanism

6.  The Government's proposal for the periodic review to be conducted by the regulator is wholly inadequate. Such a review conducted by the regulator would be little different in character from the regulator's annual report and could amount to no more than a case of the regulator marking its own examination paper. The creation of a periodic independent review arrangement is crucial to the balance that we sought to strike between giving regulators the tools they need to do their job effectively and giving Parliament, the public and the banks affected confidence that there will be independent constraints upon the exercise of those regulatory powers. One of the strengths of the banking industry (as well as one of its weaknesses) is its capacity for innovation. The new framework must be subject to regular periodic, independent review to ensure that that framework keeps pace with innovation in the banking sector as well as the experience of the operation of the ring-fence. We welcome the Chancellor of the Exchequer's indication that he is happy to consider the case for an independent review. We urge the two Houses of Parliament to support our proposal for an independent review; Amendment N in the Appendix enables the two Houses to debate and reach a decision in principle on this proposition. (Paragraph 24)

The second reserve power

7.  The Government has been at pains to make the case against the provision for full separation being implemented on the say so of the regulator. The Government has erected a straw man which it has then successfully demolished, because we made no such recommendation in our First Report. Instead, we envisaged that the legislative provisions would be brought into force only in the light of the recommendations of the independent review. (Paragraph 27)

8.  The Commission continues to believe that statutory provision for full separation should be included in the Bill now before Parliament. Amendments L and M in the Appendix facilitate debate and decision in principle on this proposition. The power would not be available to be implemented until after the case for full separation across the sector had been considered by an independent periodic review of the effectiveness of the ring-fencing framework which had come to a recommendation to that effect. The view of the regulator would be of great importance in such consideration, but we would expect the decision to implement full separation across the sector to be a matter for Government and Parliament. We have therefore made provision for the amendments which give effect to full separation across the sector as a whole to come into force only after an affirmative resolution in both Houses. (Paragraph 28)

Objectives in primary legislation

9.  The Commission welcomes the Government's clarification of the relationship between the continuity objective and the PRA's general objective, and the steps it has taken with regard to the formulation of the continuity objective. We invite the two Houses of Parliament to examine the Government's changes alongside Amendments A to D in the Appendix, which we consider adhere more fully to the ICB's objectives for ring-fencing. (Paragraph 30)

Consideration of initial proposed secondary legislation in draft

10.  The Commission notes with disappointment that even the 'principal' secondary legislation was not available at the time of publication of the Bill as we had recommended, but welcomes the commitment to publish it before Second Reading. (Paragraph 32)

Conditions on the exercise of certain delegated powers

11.  The Commission welcomes in the Government's commitment in principle to consider toughening the tests for the exercise of delegated powers for exemptions from the ring-fence. We believe that the specific tougher tests we proposed in our First Report are the right ones. We commend Amendments E and F to assist in parliamentary consideration of that recommendation. (Paragraph 33)

Parliamentary scrutiny

12.  The Commission remains firmly of the view that the considerable scope for moving the location of the ring-fence through the exercise of delegated powers necessitates enhanced parliamentary scrutiny. We invite the two Houses of Parliament to consider Amendment I in the Appendix which seeks to give effect to our proposals and which additionally provides that the Chair of the Treasury Committee should be the chair of the ad hoc joint committee. (Paragraph 35)

Ring-fenced banks acting as principal in the sale of derivatives

13.  The Commission will consider the draft secondary legislation relating to the definition of simple derivatives when it is published. We will wish to satisfy ourselves as to whether the Government has come forward with proposals for a concise and enduring definition of simple derivatives which respond adequately to our other recommendations for safeguards, including a gross cap, before deciding whether to support the sale of derivatives within the ring-fence in our final Report. (Paragraph 41)

14.  We commend to both Houses the provisions of Amendment O in the Appendix, which would facilitate more transparent regulatory oversight of any sale of derivatives within the ring-fence. (Paragraph 42)

The de minimis requirement

15.  We welcome the Government's commitment to refer specifically to competition as a factor in determining the level of the de minimis threshold. We commend Amendment P in the Appendix which gives effect to this in a way which refers specifically to new entrants and Amendment Q which provides for annual reporting by the regulator on the developments affecting the appropriateness of the level of the threshold. (Paragraph 44)

Independence and governance of the ring-fenced bank

16.  The Commission welcomes the steps the Government has taken to enable a clearer parliamentary mandate for the height of the ring-fence to be provided for the regulator in setting rules. To facilitate early parliamentary consideration of the principle of parameters for the rules being set by parliamentary means, Amendments G and H in the Appendix make provision for the additional delegated power to which the Government has agreed in principle. (Paragraph 46)

17.  We strongly support the Government's decision to place on the face of the Bill some of the key parameters for ensuring the operational and economic independence of ring-fenced banks. (Paragraph 48)

18.  The Commission welcomes the explicit provision in the Bill to enable the regulator to assign legal responsibilities on directors of ring-fenced banks in relation to its independence. We will consider further steps that might be appropriate in this area in our final Report. (Paragraph 50)

Relationship between the ring-fenced bank and the holding company

19.  The Commission finds it disappointing that the Government should seek to fall back on the original position of the ICB on a possible 'parent-child' relationship between an investment bank and a ring-fenced bank when the Chairman of the ICB has moved on from that position. Sir John Vickers has emphasised the problems of culture and standards which have come to the fore since the ICB reported as reasons for now supporting a prohibition on such a relationship, as have we. The Chancellor of the Exchequer, too, has stressed the need for independence of ring-fenced banks from investment banks, yet seems curiously reluctant to implement a straightforward structural reform to buttress it. We invite the two Houses of Parliament to consider Amendment R, intended to give the regulator a duty to require a ring-fenced bank to be owned by a holding company. (Paragraph 53)


20.  Given the evidence that we have received about the capacity of the banking sector for creative accounting alongside restructuring in the past, we believe that even a small risk should, where it has been identified, be addressed through legislation. We invite the two Houses to consider further whether adequate safeguards are in place to prevent artificial redistribution of liabilities when a ring-fenced entity is created; Amendment S in the Appendix provides an opportunity for debate on this matter. (Paragraph 54)

21.  We consider it vital that the allocation of fines for conduct issues prior to the establishment of the ring-fence is addressed by the Treasury and the regulator prior to the implementation of the ring-fence. We consider that there may be a case for the regulator being given a duty to approve any such allocation. We therefore recommend that the Government, in its response to this Report, set out its views on this matter. (Paragraph 55)


22.  An effective bail-in regime is widely-acknowledged as having a crucial role in insulating the taxpayer from losses in future banking crises and ensuring that bondholders bear their share of the downside risk when banks get into trouble in the future, and therefore pay greater heed to the conduct and performance of banks. The Commission is disappointed by the Government's reliance on reporting by international institutions and by its reluctance to consider the benefits of regular reporting at national level on progress (or the lack of it) in this area. We are similarly disappointed by the Government's apparent rejection of the case for a domestic legislative initiative as a safety net in the event that progress at European level proves inadequate. This is a particularly concerning signal in the light of the number of other important reforms which currently depend on action at a European level, a matter to which we will return in our final Report. The Commission invites the two Houses to consider Amendments T, U and V in the Appendix, which facilitate debate on these crucial matters. (Paragraph 64)

Primary Loss Absorbing Capital (PLAC)

23.  The Commission welcomes the Government's decision, in line with our recommendations, to revise and limit the Treasury's proposed powers over the regulator in relation to loss-absorbency requirements. (Paragraph 66)

24.  We agree with HSBC that the judgements with respect to the burden of proof would need to be examined by the regulators at the highest level. We welcome the broad measure of support for the proposition that the burden of proof for any exemption from PLAC requirements should rest with the bank in question, subject to a requirement for the exercise of a high-level judgement by the regulator based on reasonably foreseeable risks. We invite the two Houses to consider Amendment W which seeks to give effect to this. In addition to our original recommendations, Amendment W also makes provision for any PLAC exemption to be reported to Parliament. (Paragraph 69)

The leverage ratio and risk-weightings

25.  The changes to capital ratios, proposed as a result of the international capital rules under Basel III and the revised Capital Requirements Directive that will flow from it, will not adequately address the problems of risk-weightings. The framework for risk-weighting under Basel II was profoundly flawed, permitting certain banks to rely on their own subjective and variable risk-weighting methodologies as a basis for weakening their capital buffers, when they should have been strengthening them. There are already signs that many of these flaws will be carried through into the Basel III framework. We are therefore particularly disappointed that the Government has rejected the Commission's proposal for an annual assessment by the Bank of England of progress of work to improve risk-weighting. We invite both Houses to consider the proposition set out in Amendments X and Y in the Appendix which would require there to be such an assessment. (Paragraph 76)

26.  The historic and prospective ineffectiveness of risk-weighting makes leverage ratios at the appropriate level all the more important as a backstop. The case for leaving the leverage requirement unchanged at 33 times when the capital requirement on banks is to be increased in line with the ICB's recommendation is therefore extremely weak. The Commission remains wholly unconvinced by the case made by the Government against a higher leverage ratio for UK banks by reference to international requirements. We propose to consider this further in our final Report. (Paragraph 77)

Wider reforms and our final Report

27.  The Commission considers it essential that the timetable for the progress of the current Bill through both Houses of Parliament allows adequate time not only for the full scrutiny of the current content, but also for the addition of provisions to give effect to the recommendations in our final Report. We welcome the Chancellor of the Exchequer's implied acknowledgement that Royal Assent in 2013 is no longer appropriate. We recommend that the report and third reading stages in the House of Commons do not take place before the Summer. (Paragraph 81)

28.  The Commission is encouraged by the positive tone of the Government's response and by the steps it has already taken or agreed to take to give effect to the recommendations of our First Report. This augurs well for the Government's actions in response to our final Report. There is, however, still a long way to go if the legislation now before the House of Commons is to provide legislative impetus for a transformation of the UK banking system. The Bill as presented to the House of Commons represents not the beginning of the end for the necessary reform process, but the end of the beginning. (Paragraph 82)

previous page contents next page

© Parliamentary copyright 2013
Prepared 11 March 2013