George Osborne remains open to a compromise currently being fleshed out at a high level between the Independent Commission on Banking, regulators and the UK’s biggest banks that could substantially minimise the extra costs of banking reform, IFR understands.
The UK Chancellor of the Exchequer will tonight endorse ICB proposals outlined in April on how to make the country’s banking system safer, giving his support to plans to ring-fencing essential retail operations so as to protect them from a failure in other parts of the same firm.
Although Osborne’s statement will surprise many, coming well in advance of the ICB final recommendations on September 12, the Chancellor is expected to leave the final details to the body, opening the door to a system of “operation subsidiarisation” that banks have been heavily lobbying for in recent months.
“We’re accepting the principles of the interim findings,” said one Treasury aide ahead of Osborne’s Mansion House speech tonight. “But we’re going to wait for the final report from the ICB and its views on retail subsidiarisation and some elements of operational subsidiarisation.”
One source at the ICB said that the comments from the Treasury were “encouraging” on ring-fencing, adding that the organisation was still consulting with banks over how reforms might work.
IFR reported earlier this week that the ICB, the body charged with proposing reforms to make the UK banking system safer, is increasingly warming to the idea of operational subsidiarisation – despite saying in its interim report that it had serious misgivings about the system.
Under such a structure, banks would split their operations – retail, investment banking, payments, business lending, credit cards and the like – into separate legal entities. A separately-capitalised overarching company would then provide essential operational and funding services to the individual businesses. Funding would be provided between the servicing company and the subsidiaries on a 90-day basis with assets held in escrow, protecting the servicing company in part from the default of one of the subsidiaries.
Banks believe the structure would make it possible to quickly isolate or close individual businesses if they fall into difficulties without affecting day-to-day operations elsewhere. That would go some way to fulfilling the ICB’s wish to protect retail depositors in the event of an investment banking collapse.
Operational subsidiarisation would also enable banks to benefit from diversification and netting of assets when working out how much capital they would have to hold. Under proposals outlined in the ICB’s interim report in April, banks would have to capitalise different parts of the business separately, which would leave them having to hold much higher levels of capital overall. Read more.
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