Introduction
1. The Parliamentary Commission on Banking Standards was established to examine the crisis of culture and standards in banking which has been exposed in recent times. The Commission was also asked to examine the Government’s draft legislative proposals to bring about structural change in the UK banking sector to secure a greater degree of organisational separation between retail banking and investment banking. We discharged this last requirement in our First Report published on 21 December, and in our more recent follow-up Report on the same subject. We intend to report fully on the issues of culture and standards in our final Report later this Spring.
2. In the course of our consideration of the Government’s structural proposals, we received evidence, most forcefully from Paul Volcker, the former Chairman of the US Federal Reserve, about the risks that could be posed to attempts to improve the culture and standards of banks through banks being able to undertake “proprietary trading”—a term whose meaning is explored in the next chapter. We noted in our First Report that there was:
evidence to suggest that proprietary trading, which under the current proposals could still take place within the non-ring-fenced part of banking groups, is an activity which is incompatible with maintaining the required integrity of customer-facing banking and which could have harmful cultural effects if permitted to continue.
We indicated our intention to take further evidence in the New Year on this matter.
3. In preparing this Report, we have benefited from written evidence from major UK banks, from the Financial Services Authority (FSA) and from Finance Watch, a Europe- wide pressure group. We have also drawn upon oral evidence taken as part of our wider continuing work on banking culture and standards, most notably that from Sir John Vickers, who chaired the Independent Commission on Banking (ICB), from Martin Taylor and Bill Winters, who were members of the ICB, from individual banks, from Michael Cohrs of the Financial Policy Committee, from Lord Turner of Ecchinswell, the Chairman of the FSA, and from the Rt. Hon. George Osborne MP, the Chancellor of the Exchequer. We are most grateful to all those who assisted us in the course of work on this matter.
What is proprietary trading?
4. The term “proprietary trading” when applied to a bank could in theory refer to any trading activity which results in a proprietary position for that bank—in other words, where price movements in the relevant market affect the bank’s bottom line. However, such a definition would be so broad as to be effectively meaningless.
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