On June 14, HM Treasury and the Department for Business, Innovation and Skills published a White Paper setting out the government’s proposals for banking reform, implementing the recommendations of the September 2011 report of the Independent Commission on Banking (ICB) (for details of the ICB recommendations, see the September 16, 2011 edition of Corporate and Financial Weekly Digest).
The White Paper confirms that the UK Government will introduce legislation to implement the ICB’s recommendations in relation to ring-fencing, depositor preference and primary loss-absorbing capacity requirements. The Government intends to publish a draft version of the legislation for pre-legislative scrutiny in autumn 2012 – following the end of the White Paper comment period on September 6, 2012. The target date for completion of the passage of the legislation is late 2014 or early 2015 with full implementation in 2019.
Ring-fenced banks will be required to be separate legal entities. Services which will be required to be performed within ring-fenced entities will include deposit taking from and lending to individuals and small and medium sized enterprises. Services which must be provided outside the ring-fenced entities will include derivatives business (with a limited exemption introduced in the White Paper with respect to certain derivatives products used to hedge customers’ exposure to interest rate and currency movements), secondary market activities, services/activities that would resulting in the holding of trading book assets, services/activities that would result in a requirement to hold regulatory capital against market risk, and services to customers outside the European Union.
The White Paper proposals do not include implementation of the ICB’s recommendation to increase the leverage ratio for ring-fenced banks above the ratio required under the Basel III international standard.
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