On 12 September, the Independent Commission on Banking (the ICB) published its long-awaited report on the proposed reforms to the UK banking sector (known as the Vickers report after the ICB's chairman, Sir John Vickers). The Vickers report conceded that the reforms suggested were "deliberately composed of moderate elements" but nevertheless the ICB insisted that "the reform package is far-reaching". The proposed reforms would cost the taxpayer between £4 billion and £7 billion. The ICB commented that:
"together with other reforms in train, it would put the UK banking system of 2019 on an altogether different basis from that of 2007. In many respects, however, it would be restorative of what went before in the recent past - better capitalised, less leveraged banking more focused on the needs of savers and borrowers in the domestic economy".
Interestingly, the proposals made by the ICB go beyond the scope of proposed EU measures. The European Commission's proposal to implement Basel III (a new global regulatory standard on bank capital adequacy and liquidity) would mean that banks would only be required to have an equity capital of 7% of risk-weighted assets. The Vickers proposals would mean UK retail banks having equity capital of 10%. Additionally, under Basel III there would be a proposed tier one minimum leverage ratio of 3% (meaning that the bank's Tier 1 capital must be at least 3% of its Risk Weighted Assets). The ICB instead proposes increasing the leverage ratio to a minimum of 4.06% meaning that a bank is required to have a significantly higher proportion of assets to equity.
In response to the Vickers report, the European Commission was keen to play down the need for a more stringent UK regime, and stressed that while EU measures offer some scope for national authorities to make their own adjustments as they see fit, the aim of a harmonised EU regime is to have all members working from a "unified rulebook".
From a competition perspective, the Vickers report confirmed its position as set out in the interim report as published in April 2011 and once more recommended against referring the banking market to the Competition Commission for a market investigation. It was suggested that whether a market investigation was necessary would depend on events in the next few years: whether a strong and effective challenger results from the LBG divestiture; whether the implementation of a redirection service eases switching; and whether a strongly pro-competitive FCA demonstrates progress to improve transparency and reduce barriers to entry and growth by rivals to incumbent banks. It was suggested that if one or more of these conditions is not achieved by 2015, a market investigation reference should be actively considered. The report further assured Lloyds Banking Group that it would not be forced to sell off an extra tranche of branches in addition to the 632 branches currently up for sale, in order to comply with state aid conditions imposed by the European Commission.
The Vickers report has elicited a collective sigh of relief from the UK banks, as they will not be required to carry out a physical separation of their investment and retail businesses. Nevertheless, if fully implemented, the reforms proposed by the report will force the largest shake-up to date of the UK banking sector.
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