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BANKING


Ringing in the change


The ICB’s main recommendation for reform of the UK banking sector is that all UK-domiciled banks ringfence their high street banking operations from their investment banking activities by 2019. This applies to all UK-based standalone banks; UK banks that are part of larger groups, headquartered in the UK; and UK banks that are subsidiaries of banks headquartered overseas. It does not apply to the overseas subsidiaries and branches of UK banks.


The newly ringfenced retail banks will not be allowed to: • Provide services to non-EEA customers • Offer services that could result in exposure to other financial institutions


• Engage in ‘trading book’ activities • Offer services related to secondary-markets activity and derivatives trading.


The ringfenced retail operations will also be obliged to: • Maintain primary loss-absorbing capital of 17 to 20 per cent, with at least 10 per cent being equity


• Be legally, economically and operationally independent from their parent groups


• Have their own distinct boards of directors and corporate governance arrangements.


which comes into effect in 2019],” explains Martyn Scriven, Secretary at the JBA on behalf of the association’s committee. However, John Robinson, Chairman of the


Association of Guernsey Banks (AGB) believes that, while the ICB’s ringfencing proposals seem sensible, they are not necessarily without their own problems. “If we divorce the operational side of banking from those areas that are traditionally more profitable, it may be the case that the free banking that UK customers have enjoyed over the last few decades may not be sustainable,” he says. “You have to look at things in the balance.” He believes that British banks are already


well capitalised, and that the ICB’s capital ratio proposals represent just another arbitrary number. “The processes banks use to calculate whether they have the capital they need is very sophisticated. I don’t think that any one way of calculating capital requirements is either better or worse. And the current methodology used is well thought out,” he explains. “Further work is needed to find out if the proposed levels are appropriate. Banks will also face new capital requirements under Basel III in due course.”


18 businesslife.co February/March 2012


Island impact So, is this ringfencing needed in the Channel Islands? One of the biggest areas of uncertainty that has arisen from the Vickers Report is whether – and how – the recommendations will apply to subsidiaries and branches of UK banks that are based in the islands. The recommendations don’t place the


same ringfencing obligations on overseas subsidiaries of UK-domiciled banks unless they are actually part of a ringfenced UK retail bank, and gives no indications of how banks in offshore jurisdictions should be treated. This has given rise to suggestions that Channel Island-based subsidiaries of UK banks may not be obliged to follow any new ringfencing rules and could, therefore, end up being much more exposed to the adverse consequences of a major UK bank failure. Local governments, regulators and industry


bodies in both Jersey and Guernsey are now closely monitoring any changes that may emanate from future UK banking reforms. “Wherever possible, the JBA would


encourage the States of Jersey and Guernsey to take a common approach to regulatory


requirements,” says Scriven. “Local regulatory authorities have oversight of how subsidiaries are structured, how they’re funded and how they upstream deposits to a UK parent. As this changes, and UK banks work within any UK-legislated ringfence requirements, they’ll no doubt seek to ensure local subsidiaries are appropriately capitalised and liquidity ratios are maintained to avoid any perceived increase in risk.” The JBA also believes that


Channel Island-based arms of UK banks should benefit from any new capital-ratio proposals ultimately legislated for in the UK. Non-UK banks in the islands will also feel the impact of the Basel III regime, which requires deposit-taking banks to hold equity capital of at least seven per cent of risk- weighted assets by 2019. Fiona Le Poidevin, Deputy


Chief Executive at Guernsey Finance, acknowledges that


Guernsey’s government, together with regulators and industry bodies, is in close discussions with HM Treasury in the UK about the IBC’s recommendations. “Guernsey has been working since the report was published to determine the effects of the proposals on the island’s banking industry,” she says. “All three Crown Dependencies are working together and liaising with HM Treasury in the UK to ensure that the islands’ voices are heard, and the feedback I have had is that these negotiations have been positive to date. Until the detail is known and discussions with HM Treasury are progressed further, it is very difficult to pinpoint the full ramifications of this initiative. Indeed, draft legislation is not yet available and we are working with a set of recommendations at this stage.”


Early days There is a strong feeling across the Channel Islands that it’s still too early to tell what format any UK banking reforms may yet take, and, indeed, how British banks will interpret and implement them across their organisations. Indeed, the ICB’s recommendations allow UK banks significant leeway in how they satisfy


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