Follow Us on Facebook Follow Us on Twitter Follow Us on Google+ Follow Us on Pinterest Follow Us on Tumblr Visit our YouTube Channel Subscribe to our Feed Subscribe via FriendFeed

Connect With Us

Separating Retail Banks May Take A While

by Jim ONeil on September 12, 2011

in uk banks

Recommended UK governmental legislation regarding a ring fence of retail banking operations by big banks is expected to be handed down by the Independent Commission on Banking. This ring fence will separate investment banks from retail banks. Experts say that it should be phased in over several years in order to prevent bigger issues.

Large banks like Barclays and Royal Bank of Scotland will have technical difficulty insulating retail activities for small businesses and households from investment banking. The Treasury-established Commission recognizes this and has determined that ring fences should be established over a lengthy period. At the same time, it is calling for legislation to be implemented quickly.

The Commission feels that uncertainty regarding structural reforms is damaging to taxpayers, creditors, and investors. These reforms will make it less likely for a large bank to require huge loans and taxpayer investments when it experiences trouble. The ring fence and other reforms should make it easier and less expensive to support sectors of the banks that are vital to the economy. In addition, rescue costs will be paid by creditors and shareholders, not uninvolved taxpayers.

Not everyone is a fan of ring fencing because they feel it will reduce the supply of business and household loans, weakening the economy further. By relying less on taxpayer support during a crisis, banks position themselves as riskier with lenders. If banks have more trouble borrowing, they will not find it easy to lend.

Even the British Prime Minister believes that ring fencing may counteract the economic recovery. Some legislators believe that reforms may encourage banks to relocate their headquarters to other countries. The Treasury feels that these worries are extreme and unnecessary. The report from the Banking Commission will be published on Monday, eliminating any speculation regarding the recommended approach and timeline for implementation.

Comments on this entry are closed.

Previous post:

Next post: