In the past few decades the new banking regulations introduced by Britain whether liked by the related persons and organizations some of the examples are “Euro-dollar Market”, “Private Finance initiative” and “light touch” regulations of financial firms. However, the Britain cannot claim to provide total solution or remedial measures for the financial crisis faced by the world. Credit-default swaps and collateralized-debt obligations are introduced by USA. Yet, London is the largest Hub for banking and trading activities, and most of the innovations, researches and experiments related to finance are being conducted in London.
Now, with the release of a recent report from the Independent Commission on Banking, whose recommendations are widely accepted and British Government has planned to implement these, Britain is on the verge of conducting a bold experiment like previous ones. This time the aim is to with draw long standing public guarantees that support many of the world’s largest financial institutions without blowing or affecting the economy or the financial institution.
The Commission suggests splitting country’s banks into two parts, dividing their commercial and retail segments from the high risk or volatile investments and wholesale sorts. Accordingly the retail bank will hold large buffer reserves of equity and loss-bearing debt that far exceeds those decided internationally.
However, there are three potential objections which can arise as a result of the regulations proposed by the commission.
a) Tougher rules will bank the British banking less competitive.
b) There are diversification benefits to the universal banking models which could be lost due to complete separate of retail and investment segments.
c) The third and most important critique is that ring-fencing and collecting extra capital will increase the banks’ costs and offering credit will become more expensive in British economy.
In response to the above mentioned objections, the commission has recommended
- Higher standards for the banking system that are rooted in the domestic market. Britain’s investments banks will held the same standards as are those of other international investment banks
- The commission rules out the complete separation of retail and whole sale businesses as when the retail business of some of the banks failed during the financial crisis; it was the investment arm which had provided support in that time of difficulty.
- For tackling the third objection, the banks are given ample time to devise and implement new structure and plan for resolving/funding the additional cost required. By making the dissolution of the troubled banks easier, the commission wants the bank creditors to bear the price of potential losses.
But in the case of failure there lies many issues which are yet to be resolved. The ring-fence structure requires a distinction between the segments of banks that need saving (deposit collection, payments etc.) and those not need saving (bonus based investment banking). However, in the time of crises, investment banks cannot be allowed to act freely. Answer proposition of the commission is to get banks to hold larger reserves for “bail-in” debt for covering the losses of the private creditors of the failing institution is a fine idea. However, this needs to be more fine-tuned before imposing it as a law on the financial institutions.