U.K. lawmakers urged Chancellor of the Exchequer George Osborne to give the government powers to break up banks should they fail to comply with proposed rules to erect firewalls around their retail operations.
The Parliamentary Commission on Banking Standards also called in a report published in London today for a “periodic, independent review of the effectiveness” of the firewall every four years to assess whether banks are implementing the policy properly “and to advise whether a move to full separation across the banking sector as a whole is necessary to meet those objectives.”
“The proposals, as they stand, fall well short of what is required,” Andrew Tyrie, a legislator from Prime Minister David Cameron’s Conservative Party and the chairman of the panel, said in an e-mailed statement. “Banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivized not to.”
The panel’s recommendations may anger Osborne, who appointed the commission earlier this year and told it last month not to overstep its remit and unpick the consensus on how to make Britain’s banking system safer. The recommendations are not binding on the chancellor, though he may meet political opposition if he chooses to ignore them.
The Treasury made no commitment to implement the panel’s recommendations, saying in a statement in response to the report that they will be considered when the bill begins its passage through Parliament next year. It reiterated the government’s commitment to building consensus in the past, suggesting Osborne’s department has little appetite to reopen the debate on how best to make banks safer.
The panel recommended that banks’ retail units, while protected by the firewalls, should have no government guarantee. It demanded greater powers to scrutinize detailed legislation in future to prevent safeguards being undermined.
Tyrie said a move to give the government the power to enforce separation of banks’ retail and non-consumer activities would be aimed at deterring aggressive lobbying to water down implementation of the rules.
Successive witnesses at the committee’s hearings have expressed concern that proposals by the Independent Commission on Banking, led by Oxford University Professor John Vickers, which provided the basis of the legislation, will be diluted by the banks before they are properly implemented.
The commission, made up of members of both houses of Parliament, said a “specific statutory provision for enhanced parliamentary scrutiny” was needed after it found that that Osborne’s existing draft primary legislation to establish the firewalls gives little clue on how regulators will enforce the changes on banks. The absence of secondary legislation spelling out details “seriously impeded” the panel’s work.
“The commission for much of the time was working in the dark,” Tyrie said.
The panel also called on the government to include in the Financial Services Reform Bill stronger powers for the Prudential Regulation Authority -- the new overseer of bank stability within the Bank of England.
Bank retail businesses should have operational independence when it comes to governance, risk management, treasury functions, capital and liquidity, the panel said. Bank board members should have a statutory duty to protect the integrity of the firewalls.
The commission also demanded that the Bank of England be given the duty of setting leverage ratios during the second quarter of 2013 and called for ‘bail-in’ powers -- in which bondholders as well as shareholders shoulder the cost of resolution of a failing financial institution -- to be strengthened. Banks should also be allowed to hold simple derivatives inside their retail operation, it said.