BRITAIN’S banks could face the threat of being broken up after a report warned the ring-fence to separate risky operations from savers’ deposits needed “electrification”.
The Parliamentary Commission on Banking Standards – whose membership includes the Bishop of Durham, the future Archbishop of Canterbury Justin Welby, former chancellor Lord Lawson and Treasury committee chair Andrew Tyrie – said plans included in the Banking Reform Bill “fall well short of what is required”.
In its first report since being set up in the wake of the Libor-rigging scandal, the Commission said legislation should include a reserve power for full separation if banks did not implement reforms.
The Commission will also take evidence in the New Year on whether separation of proprietary trading would be more appropriate.
Its initial recommendations could put it on a collision course with Chancellor George Osborne, who warned the Commission last month against “unpicking the consensus” over reform proposals in the Bill.
The report comes a day after Swiss banking giant UBS agreed a £940m settlement for “widespread and extensive” attempts to fix Libor rates after admitting fraud and bribery.
Andrew Tyrie, chairman of the Commission, said the latest revelations “beggar belief”.
“It is the clearest illustration yet that a great deal more needs to be done to restore standards in banking,” he added.
While the Commission said it welcomed plans for a ring-fence, designed to make the system more secure and to protect deposits from so-called casino banking operations, it added that loopholes could easily develop.
The ring-fence would be “tested and challenged by the banks”, while it said politicians could also succumb to lobbying from the industry.
Mr Tyrie said: “For the ring-fence to succeed, banks need to be discouraged from gaming the rules.
“All history tells us they will do this unless incentivised not to. That’s why we recommend electrification.
“The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it.”
Banks’ board members should have a legal duty to preserve the integrity of the ring-fence,says the report, while there also needs to be clear dividing lines.
The commission was also asked to look at whether retail banking operations should be able to offer simple derivative products, which have been thrust into the spotlight following the recent interest-rate swap mis-selling scandal.
The Commission said it would also look at measures to improve the culture in the banking system in the wake of this year’s series of shocking scandals.