The government has proposed that the investment arm of banks should be ring-fenced from its retail banking division but the Commission said the fence needs “electrification” to avoid the wall becoming eroded and vulnerable over time.
Andrew Tyrie, the chairman of the Parliamentary Commission on Banking Standards, said the Commission welcomed the creation of a ring-fence which would contribute to the government's objectives of making the banking system more secure.
He said: "But the proposals as they stand fall well short of what is required. Over time the ring-fence will be tested and challenged by the banks. Politicians too could succumb to lobbying from banks and others adding to pressure to put holes in the ring-fence.”
The commission said “electrification” is needed to give the legislation a reserve power for separation which the regulator knows he can use if necessary with periodic reviews of the sector with the appetite to enforce tougher measures if the ring-fence isn’t working.
Its conclusion is that a defence should be created in the form of a specific statutory provision for enhanced parliamentary scrutiny of the use of delegated powers which can change the location of the ring-fence if necessary.
The concern is that politicians will come under pressure from the banking sector to “put holes in the ring-fence” seeing the protection erode over time.
To combat this anticipated pressure the commission has recommended that the initial secondary legislation should give the regulator a duty of ensuring operational independence for the ring-fenced bank in respect of governance, risk management, treasury management, human resourcing, capital and liquidity.
