From my colleague Lawrence Baxter comes this very useful comparative glimpse at the financial reform questions we're addressing here today:
This morning the British Independent Banking Commission (ICB) released its long-awaited Final Report. Given the clear direction signalled by the ICB in its Issues Paper: Call for Evidence released a year ago, the recommendations in the report had already been anticipated for months. The British Government has accepted the report, at least in principle. The Financial Times reports that the Chancellor, George Osborne, Business Secretary, Vince Cable, and the Prime Minster, David Cameron agreed last week that the report’s main recommendations should be enacted.
The Report contains three major sets of recommendations:
1. Retail banking operations should be “ring-fenced.” In other words, they should separated as legal entities from the larger corporate banking group of a “universal bank” (for example, one that provides wholesale and investment banking operations as well), and have their own boards of directors. The retail entity would be restricted to certain activities, and other financial organizations would be prohibited from engaging in these activities. There are numerous related restrictions which, in sum, vaguely resemble the kind of firewall created in 1933 by the US Glass-Steagall Act (now repealed).
2. Large banks should have higher “loss absorbency” capacity. This is defined through a series of requirements varying according to the size of the risk-weighted asset ratios of these organizations, their leverage ratios, and whether they are global systemically important financial institutions (so called “G-SIFIs).
3. Stricter enforcement of market efficiency and competition rules (the analogy to US antitrust laws), including greater transparency requirements. An interesting element of this recommendation is that the “product ranges” of banks should “include an easily comparable standardised product.” Here let us recall the continuing battle in the US over the Consumer Financial Protection Bureau and its powers. The Report also welcomes the British government’s commitment to give the recently created Financial Conduct Authority a “new primary duty to promote competition.” A timely cross-Atlantic comparison is the enhanced investigation currently being conducted by the Fed of the proposed acquisition of ING Direct by Capital One–a deal that would have been hastily approved only a few years ago.
These are strong recommendations based to some extent, in my view (here and here), on the very sound principle of subsidiarization, which is designed to inject modularity into the structure of the behemoth universal banks. The recommendations are, however, a little weaker than banks had originally feared, and they would only need to be fully implemented by 2019 (timing designed to coordinate with the Basel III implementation schedule). As a result, the stocks of some British banks actually rose today, notwithstanding the fact that the recommendations will cost the industry approximately $9.5 Billion (£7 billion). A major part of this cost is the result of the higher cost of funding that investment and other non-retail banking will incur if they can no longer use the inexpensive contributions of retail depositors.
Of course the industry and its allies, including the Confederation of British Industry (CBI), are howling their opposition to the recommendations. The head of the CBI, John Cridland, was so moved that he delightfully called the anticipated ICB recommendations “barking mad.” So until the British Parliament actually enacts them into law we cannot be certain of their final form and strength.
But one should salute a sincere, thoughtful and robust effort on the part of the Commission to get at the source of one of our major sources of financial instability, namely the sprawling universal banks that, by virtue of their necessary Too-Big-To-Fail nature, hold all of us hostage to their fortunes.
Can we expect similar fortitude from our non-independent and grotesquely bureaucratic Financial Stability Oversight Council?