[Skip to content]

Sign up for our daily newsletter
The Actuary The magazine of the Institute & Faculty of Actuaries

Independent Commission on Banking: round-up of reaction

In June 2010, the Independent Commission on Banking, chaired by Sir John Vickers, was asked to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition, and to make recommendations to the Government by September 2011.

The main recommendation of the ICB's Final Report is to ring-fence banks' retail and small business dealings from their riskier investment banking operations - a move that had been trailed in the ICB's interim report in April.

Banks will be required to hold a capital ‘buffer' of at least 10% of top quality assets, well above the 7% recommended by the International Basel Committee on banking. And banks will need further loss-absorbing capacity of between 17% and 20% of the highest quality assets.

In light of the continuing economic crisis, banks will have until 2019 to implement the detail of the recommendations. The cost to the banks of the proposed changes is estimated to be between £4bn and £7bn.


Andrew Gray, UK banking leader:
"The measures recommended will have a far-reaching impact on the way in which banks operate in the UK in future. A key question for government to consider will be the trade-off between improved financial stability and facilitating economic growth.

"Ring-fencing on its own does not change the risks inherent in banking (except when it comes to resolving failed firms) and the ICB recommends higher capital levels than those proposed by the Basel Committee.

"The importance of a strong banking sector as an integral part of the UK economy is clearly recognised, as is the need to ensure the UK remains a globally significant centre for financial services.

"Overall, these proposals, while not unexpected, will represent a significant change to the UK banking landscape. These are detailed proposals which will take time to digest and, in doing so, more questions will emerge. It is too early to assess the real impact on the UK banks and the wider economy. The real consequences will only become clear once the Government decides what is to be passed into law."

Ernst and Young

John Liver, partner and lead on Global Regulatory Reform:
"There is no doubt that, as a result of the ICB recommendations, banks will have to hold extra loss absorbing capital at group level, which will have a major impact on costs. So far other countries do not have such firm proposals and so significant differences will be an important factor in decisions about where banks are headquartered and the extent to which it is attractive for UK headquartered groups to own a UK retail bank.
"The 17-20% primary loss absorbing capacity is a very significant number to come out of the report - it applies to the whole group and is definitely higher than the industry expected. Regardless of whether Cocos are accepted, this will have considerable impact on the banks' bottom lines."

"The recommendations do not really go very far towards addressing the issue of increasing competition, in effect further blocking new players from the market. It is sensible that in such tight timescales the commission hasn't pushed for full account portability. The proposals on transparency could galvanise consumer momentum to switch accounts and the cost implications of the recommendations in the Vickers report will mean business model change and could mean the end of free banking as consumers now know it. The seven day timetable for account redirection will be a challenge for firms in these timescales."

"The 2019 deadline for ringfencing may not actually be that relevant when it comes to the practical implications for banks. Banks need to work out the implications of ringfencing now, they do not have the luxury of waiting until the legislation process is over. The ICB proposals... have to be seen in the context of wider regulatory reform around Recovery and Resolution Planning as these two policy initiatives have significant overlap in the effect they will have on bank's operational models. By mid 2012, which is the proposed FSA deadline for an initial RRP, banks will have had to made clear decisions about the direction of travel on legal entities, tax and so on, as driven by ringfencing. The pressure will be on the banks to try and navigate this, maintaining the flexibility to respond to legislation following the ICB report while implementing RRP to meet FSA timescales."

"Ring fencing does not deal with all the elements of systemic risk as not all essential services to the economy are going to be in the retail ringfence. The international and domestic work streams on Recovery & Resolution policy cover this more comprehensively and in shorter timescales, which will mean that that the specifics of the ICB become urgent considerations for banks as they put together their first draft RRP plans by mid 2012."


David Strachan, Centre for Regulatory Strategy:
"The headline capital number of 17 to 20% is very significant news. It doesn't all have to be equity, but other instruments are subject to regulatory approval.
"The fact that those banks that are not able to convince the authorities that they have an effective resolution plan look to come out towards the top of that range means banks have a very strong incentive to introduce effective ones. Measured against international standards it's a high requirement."


Jon Pain, co-head of KPMG's Regulatory Centre of Excellence in Europe:
"The ICB recommendations are only one small step short of full Glass-Steagal separation of retail and investment banking in calling for operational, economic and legal separation. While this may improve safety of retail banks, it is ‘game changing' for bank structures and will come at a cost. In many respects we are seeing a return to a more simple 1940/50s style of retail banking where it is perceived as more of a basic utility with low return on equity for shareholders.

"To comply with the ringfencing requirements outlined in today's report, banks will need to fundamentally overhaul their business models. Essentially banks will need to create another bank within their bank with new boards and systems. This will come at a significant cost and the challenge for banks is to get this right in the first instance as it will not be easy to undo.

"The biggest surprise from today's report is the doubling of capital requirements although it is not clear how this relates to CRD4. Retail banks will need to reassess whether they can make sufficient returns and will need to fundamentally rethink their business model and the subsequent costs for retail and SME customers. This in turn may accelerate the end of free banking in the UK. Equally new entrants will need to assess carefully the attractiveness of entering the market in this ‘new world' of retail banking.

"The report is also littered with scope for additional regulation and competition responsibilities of the Financial Conduct Authority. Questions also remain over the exact details of what is permissible under the ringfencing requirements. The industry awaits Treasury's clarification on both this issue and the exact timeframes around implementation."

Tim Kirk, partner:
"The... report's recommendations create increased risks to an already fragile economic recovery and to the international competitiveness of the UK financial services sector.

"The Commission's recommendations are packaged up as a way to protect tax payers from picking up the bill for losses made by risky investment banking activities. However, the report does not assess how these reforms will affect the ability of banks to continue lending to businesses that are seeking to expand their operations, activity vital to our recovery. It's already estimated that the impact of global banking reform since 2008 will knock 3.2% off gross domestic product over the next 5 years in the world's biggest developed markets. The Vickers' reforms will add to this burden in the UK."

"Although the report notes that the proposed ring-fencing is intended to ‘provide a sound basis for the supply of credit to households and non-financial businesses in the economy', and that the estimated costs could be up to £7bn, it does not assess the impact these costs and higher capital requirements will have on the banks' ability to lend to businesses.

"Business lending is likely to be hit significantly by the ring-fencing, with less funding available at a higher cost.
‘Despite public and political anger towards banks, they remain a major contributor to the UK economy. By going beyond international minima for capital requirements, the UK becomes a less attractive location for banks."

Dr Neil Bentley deputy director-general:
"The proposals on capital requirements are out of step with internationally agreed measures underway so will increase the cost of lending for UK businesses, putting them at a disadvantage to their overseas competitors."

The British Bankers' Association (BBA)
"UK banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by UK, EU and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained."

Federation of Small Businesses
John Walker, national chairman:
"The recommendations laid out in the report have the potential to make the sector safer and more secure. The Government must not water down the proposals and we urge the Chancellor to ensure that they are fully implemented before the end of this Parliament.

"Each of the main political parties has promised some kind of banking reform and it is what people expect to see. With 89 per cent of small businesses believing that the way the sector works needs to change, it is now imperative that the Government makes this happen."

Daiwa Capital Markets
Michael Symonds, analyst:
"Into the unknown we go, in terms of the recommendations. The main issue really is the fact that the UK is going it alone on their structural reforms and the potential damage it will do to the competitiveness of the UK banking sector and economy as a whole. I guess it is going to disadvantage banks in the international funding markets... We are still waiting but the damage we see is potential ratings downgrades and soaring funding costs for UK banks most exposed."

Consumer Council
Antoinette McKeown, chief executive:
"Today's report marks an important step towards a new system where banks must compete rigorously for consumers' business, and one that will not cost taxpayers billions of pounds if things go wrong. Legislation is needed to bring about the significant changes in the market. Whilst it is important to get that right, an eight-year timeframe is too long for consumers who have already borne the brunt of banking failures to date. It is also important that consumers don't bear the cost of these structural changes through higher fees and charges. However, we look forward to seeing the detailed action plan which the Chancellor has this afternoon committed to delivering by the end of this year.

Building Societies Association
Adrian Coles, director general:
"We welcome the ICB report which if implemented will make the banking system in the UK both more stable and competitive. The ring-fence proposals appear both sensible and proportionate.

"This report is a vote of confidence in the UK building society model which has provided security and good returns to UK consumers over many years both in good economic times and bad.

"Building societies have not been part of the problem but are seen as a model for the solution with the Commission advocating it as a 'particularly good basis for the risk management of ring-fenced banks going forward'.

"Our hope now is that Government will move ahead with these recommendations and at the same time use it to do what they promised in the Coalition Partnership Agreement and bring forward detailed proposals to foster diversity in financial services and promote mutuals."

Graeme Hughes, group director:
"The ICB is right to see the building society model as a framework for designing the ring-fence... As a building society, Nationwide has always operated a ring-fence model and this has stood us in good stead to weather the financial crisis."

Cavendish Asset Management
Paul Mumford, fund manager:
"It will be a bit of a relief for investors to have the thing on the table because at least they now know what the worst case scenario is."

Brendan Barber, general secretary:
"These proposals will make banking safer, even if on a timescale that gives the banks too many opportunities to lobby for loopholes. The government must legislate speedily to ensure that the plans are not watered down.

"But they will not do enough on their own to turn banking and finance into the engines of recovery and economic growth that we desperately need. Real banking reform would put new sources of investment such as a national investment bank and proper green investment bank at its heart."

David Fleming, national officer:
"The proposals set out today kick the overdue reform of the banking sector into the long-grass. The suggestion to create firewalls in 2019 will bring immediate uncertainty to workers across the sector, while the greedy bankers find ways to manoeuvre around, and lobby against these reforms.

"Simply creating a firewall is a best a weak gesture and at worst a pointless act which will not in any material way impact the behaviour or culture at the top of the banks where this crisis was born."