Responding to recommendations in the Parliamentary Commission on Banking Standards’ First Report, Iain Coke, Head of ICAEW’s Financial Services Faculty, said:
“Neither splitting banks up nor ‘ring-fencing’ can safeguard against banks’ bad risk management, and neither can guarantee that the taxpayer will not be called upon, yet again, to bail them out. There are significant problems with either. For example, even if split away, some investment banks would remain large and complex, and their potential failure would still be a threat to the whole system.
“Retail banks are not intrinsically safer than investment banks. Historically most bank failures have come from poor traditional lending – especially for real estate – rather than from investment banking. Also, the effect of bank failures varies; Northern Rock’s liquidity crisis may well not have become systemic if there had been no credit crunch.
ICAEW suggests it is not as straight forward as to say ‘small banks are good, big banks are bad’, highlighting that making banks smaller might solve some of problems, but create new ones; big banks are needed to cater for large businesses and infrastructure projects.
Commenting on the proposals to create a ring-fence, as recommended by Vickers, Iain said: “If the government is wedded to the idea of ring-fencing then the fence posts need to be moved – so that all forms of essential banking are protected, not just retail and SME deposits, in case of an insolvency. Retail deposits are already protected by the Financial Services Compensation Scheme (FSCS), and non-retail depositors such as schools, charities and hospitals would lose out if the fence is placed where it’s been pencilled in on the planning documents.
“As these are new and untested policies, it is critical that the impact of the new regime is kept under close scrutiny and fully reviewed after a couple of years. If the objectives are not met, policy makers should not be scared to make changes.”
ICAEW published a report earlier this year, entitled Market Failures; Market Solutions, which highlighted the need for a wider cultural change in the financial services sector. It urged a move away from the ‘what-can-I-get-away-with?’-attitude, calling for ethics and integrity to be embedded in banks’ culture.
“There are measures available that could help to mitigate threats; such as the current strengthening of capital and liquidity standards. But reform must go further; governance and management must be strengthened,” said Iain.