On 12 September 2011, the Independent Commission on Banking issued its Final Report, setting out its recommendations to the UK government for reforms to the UK banking sector. Welcomed in principle by George Osborne, the Chancellor of the Exchequer, the government has committed to introduce legislation to implement the proposals and to do so within the life of the current UK Parliament, i.e. before June 2015.
The ICB stopped short of recommending a complete institutional separation of retail banking from investment banking. Instead, UK banking groups will continue to be allowed to conduct retail and investment banking in separate corporate entities, for example as subsidiaries of a group parent or holding company.
The ICB also recommends that larger ring-fenced banks should hold more capital than would be required under the Basel III international accord or proposed EU implementing legislation. This is to be achieved by imposing an additional ring-fence buffer of 3% common equity which together with the enhanced Basel standards could require a ring-fenced bank to maintain a common equity capital ratio of up to 12.5% (assuming a counter-cyclical buffer of 2.5%). In addition, the ICB proposes that certain UK banks and ring-fenced banks should hold loss-absorbing capital of 17% (rising in certain circumstances to 20%), comprising regulatory capital instruments recognised under Basel III as well as certain debt instruments that can bear losses on resolution. Finally, depositors should rank ahead of other unsecured debt on insolvency.
Further, the ICB recommends enhancing the divestiture already planned by the Lloyds Banking Group so as to support the creation of an effective competitor to the established UK retail banks. In addition, the ICB proposes measures to encourage current account switching, notably a redirection service for credits and debits linked to current accounts.
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