A year from now the Independent Commission on Banking will publish its findings and recommendations on the structure of banking in the UK. In today’s Issues Paper we set out the key questions to be addressed, we outline a range of possible reform options to promote financial stability and competition, and we call for evidence on their strengths and weaknesses.
In these opening remarks I will highlight some points about the Issues Paper and outline the next steps in the Commission’s work.
The first thing to say is that today’s document is a Questions Paper, not an Answers Paper. It seeks to clarify and organise the main issues as we see them, but does not offer answers. We don’t have pre-conceived ideas about what the answers are. Some say that it’s unwise even to debate structural reform of the UK banking sector. We firmly disagree. Experience shows that the risks from not asking hard questions about financial stability are far greater than from doing so. Sweeping them under the carpet would do no good for long-run confidence. Far better to debate problems in an open, rational way.
So we are keen to stimulate as wide a debate as possible, and we hope that anyone with an interest will feel able to provide views and evidence in response to the questions we are asking today.
The Issues Paper provides a background description of the UK banking sector naturally including its important international aspects and goes on to discuss policy objectives, with emphasis on stability and competition. We then lay out a map of structural and (in the words of our remit) ‘related non-structural’ reform options to address the problems of systemic instability, moral hazard, and impaired competition and customer choice in banking services.
The range of such options includes separating retail and investment banking, but goes much wider. Various possible forms of separation need careful analysis. So too do kinds of separability – the idea that banks can be made sufficiently modular that their riskier parts can fail safely, without hitting the public, so that component failure doesn’t mean system failure. Related ideas about contingent capital and structure-related capital surcharges on systemically-important banks are also set out. They too could have a role in improving stability and competition, and it is an open question whether or not more direct structural measures would do better. The Paper also talks about reform options for the structure of the markets in which banks and others operate, from retail services to derivatives trading, including possible ways of reducing market concentration.
We are now asking which of the broad options that we set out most deserve fuller consideration. Should some be non-runners? Should further reform options be added? What are the strengths – in terms of stability and competition – of the options described? What are their weaknesses, and risks of unintended consequences, bearing in mind regulatory arbitrage possibilities?
An aspect of this last point is geographical arbitrage the idea put about that banking operations would leave the UK if resulting reforms were uncongenial to banks. I sometimes wonder if those who say this realise how sharp a conflict they are suggesting between the interests of the banks and the public interest. In fact, greater financial stability is good for banks as well as for the wider economy, and it will be interesting to see whether banks bring forward constructive proposals to that end. We would welcome written submissions in response to our call for evidence by mid-November. We are also sending questionnaires to the main banks. Later in the year we will start holding hearings. There is no single best way to do this, so we will have a combination of private single-party hearings with the banks, and a number of public events. There will be updates on all this on our website. The Commission team also has a number of its own work projects in train.
In the spring we plan to publish an Options Paper that discusses in much more detail what we then judge to be the leading reform options. A further round of public consultation will follow that.
The reform agenda internationally, and at national level elsewhere, will, we hope, be advancing in various practical ways over the coming year. Our work will of course be informed by those wider developments, and in view of the importance of the UK as a financial centre, a constructive UK debate may have relevance more widely.
Thank you for your attention, and we will now be happy to take questions.
Click here to download the Issues Paper – Call for Evidence
