The Independent Commission on Banking

Government response to ICB final report

On 19 December 2011 the Government published its response to the report by the Independent Commission on Banking (ICB), which sets out plans to fundamentally reform the structure of banking in the UK. This response agrees with the ICB’s recommendations and outlines how the Government will legislate to create a stable banking sector that supports lending to businesses and families, and removes the implicit taxpayer guarantee in the event of a bank failure.

The Government will implement the ICB’s advice in stages with the full package of reforms completed by 2019. All necessary legislation will therefore be put in place by the end of this Parliament. The Government will publish a White Paper in spring 2012 setting out further detail on how the recommendations will be implemented; in advance of that, the Government is open to views on how to implement these plans.

Government response in easy-to-browse format

Background

Individual financial institutions (particularly ‘universal’ banks, which combine both retail and investment banking arms) can pose risks to the financial system at large and threaten financial stability. They may also raise barriers to competition.

The Government believes that reform of the banking system is essential to avoid a repeat of the financial crisis, promote a competitive economy, support economic growth and ultimately protect and sustain jobs.

To this end, the Government established the Independent Commission on Banking (ICB) in June 2010.

The ICB will assess how to:

reduce financial stability risk in the banking sector, by exploring the risk posed by banks of different size, scale and function;
mitigate ‘moral hazard’ in the banking system - this is where institutions are insulated from the natural consequences of taking risks due to their size and importance;
deal with the issue of banks being seen as ‘too big to fail’;
reduce the likelihood and impact of firm failure; and
promote competition in both retail and investment banking.

Recommendations will be made around larger ‘structural’ reform, such as the separation of retail and investment banking activities, as well as smaller, ‘non-structural’ measures to promote stability and competition for the benefit of consumers and businesses.

Sir John Vickers is chairing the Commission, supported by Clare Spottiswoode, Martin Taylor, Martin Wolf and Bill Winters.

Terms of reference for the Commission (ICB website, opens in a new window)

Issues paper

The ICB published an Issues Paper on 24 September 2010 to structure the debate and invite submissions of evidence. Consultation responses were published on the ICB’s website.

Interim report

On 11 April 2011, the ICB published an interim report outlining key proposals for consideration toward improving stability in the banking sector, including:

greater protection for the retail operations of large banks, with retail banking activities established in separately capitalised subsidiaries; and
an improved loss absorbency regime to make it easier for banks and their creditors to absorb losses, including through additional capital requirements, ‘bail-in’ and extra protection for ordinary deposits, so all other sources of funding must be exhausted before these deposits suffer losses.

The interim report also made recommendations for improving competition in the banking sector, including:

that Lloyds Banking Group (LBG) divest more branches and customer accounts than already planned (LBG is already required to divest at least 600 branches as a condition of the state aid it received during the crisis);
that the industry agree on and implement measures to make it easier for customers to compare and switch personal current accounts; and
an enhanced role for the new Financial Conduct Authority (FCA) in promoting competition.

Consultation responses to the interim report were published on 13 July 2011 and were published on the ICB’s website

Government response

In his Mansion House speech of 15 June 2011, the Chancellor announced his support in principle of the ICB’s interim proposals in respect of:

ring-fencing high street banks to make them safer and protect their vital services to the economy; and
the introduction of ‘bail-in’ so that private investors, not taxpayers, bear losses if things go wrong.

The Chancellor also set out that the UK would continue to seek international agreement for a capital surcharge for systemically important financial institutions, as the ICB have proposed. He also supported the ICB’s view of the importance of competition in retail banking.

The Chancellor emphasised in this speech that reforms taken forward will however need to meet the following principles:

banks must be allowed to fail safely without affecting vital banking services and without imposing costs on the taxpayer;
any reforms must be applicable across our whole banking industry, with all its diversity; and
proposals must be consistent with EU law and the UK’s international treaty obligations.

Final report

The ICB’s final report was published on 12 September 2011. The Government is examining the ICB’s proposals in detail, including the costs and benefits of what has been proposed, and the design and implementation options.

It is the Government’s intention to provide its initial response to the Commission’s proposals before the end of the year, introduce any necessary legislation by 2015, and implement any resulting measures by 2019.

Final report - full document (ICB PDF 2MB)