City lawyers have spoken out against reforms proposed by Sir John Vickers’s Independent Commission on Banking
The ICB’s 363-page final report, published this week, recommends that UK incorporated banks ring-fence their retail banking activities from their more risky investment banking operations.
Retail banking operations would be required to increase the amount of equity they hold to at least ten per cent of risk-weighted assets—by comparison, Basel III requires banks to hold seven per cent equity—and to have an additional seven to ten per cent of capital to cushion any losses.
The banks could have until 2019 to implement the reforms, which will now be considered by the Chancellor, George Osborne.
Allen & Overy regulatory partner Bob Penn said: “The proposals are more draconian than expected, but tempered by the long lead-in time for implementation.
“Ultimately, the Commission is making a bet that the implementation and ongoing costs associated with ring-fencing and higher capital requirements for large UK banks will outweigh the costs of future crises. This may be correct, but there is no avoiding the fact that those costs will be borne by bank customers.
“There will be considerable concern for UK banks' international competitiveness given the recommendations on primary loss absorbing capacity. Unless there is international consensus on this area, UK financial institutions will be hamstrung in their international dealings.”
Penn said a “likely side-effect” of ring-fencing would be the migration offshore of private banking offerings.
Tony Anderson, banking partner at Pinsent Masons, said: "The ongoing reaction of the markets to these proposals, whether other jurisdictions follow suit and whether they ultimately position London as a financial safe haven are the big questions. The government would be wise to delay any reforms until the economy is better able to digest them.”
