The Confederation of British Industry (CBI) – the UK’s leading business organisation – has stated that much more work is needed to ensure the planned changes stimulate business growth, job creation and economic recovery for the UK.
According to an official CBI statement, “changes which significantly increase costs and create more instability help no-one”.
Businesses need more stability in the banking sector and recognise that this comes at a price, but much remains to be done to demonstrate that the balance between the costs and benefits of the proposed changes is a positive one.
Companies see real value in the universal banking model, in terms of integrated services as well as being able to spread financial and operational risk, so do not want to see any separation of retail and wholesale banking.
Increasing competition in the banking sector is important for both retail and business customers, but current ring-fencing proposals may unintentionally reduce competition in the market.
Reform must support “business growth and job creation”
John Cridland, the CBI’s director-general, said: “It’s crucial to the UK’s economic recovery that banking reforms support business growth and job creation. Businesses want greater stability in the financial system, but it’s not clear that the current ring-fencing proposals will deliver this, and could in fact lead to greater instability.”
Cridland added: “These plans could result in riskier lending within the ring-fence and cause significant disruption to banks and businesses outside the ring-fence in the event of a crisis. All banks have unique business and funding models, so if the Independent Commission on Banking (ICB) does progress with ring-fencing, the scope must be sufficiently flexible to recognise this. A one-size-fits-all solution would force all banks to have the same business model, which would stifle innovation, reduce competition, increase costs and hamper growth.”
Continuing his response, Cridland commented: “Any banking reforms need to be agreed internationally to avoid damaging the UK’s position as a leading global financial centre. We must not put British businesses at a competitive disadvantage on the global stage.”
On ring-fencing and stability, the CBI said more work was needed to show that current plans would not:
- lead to riskier lending within the ring-fence because deposits held here would be considered safe, even over and above the limit of the deposit protection scheme
- increase leverage in the system because of the likely mismatch between ring-fenced assets and liabilities at universal banks
- be ‘procyclical’ – making future crises worse as credit is withdrawn from corporate banks outside the ring fence which will be viewed as riskier (this would cause damage to businesses and push the wider economy further into recession)
If the ICB ultimately decides to proceed with ring-fencing, the scope should be determined through agreement between individual banks and the regulator rather than a blanket solution imposed uniformly, which could lead to greater instability.
A flexible approach, subject to a supervisory judgement by a regulator, would:
- give businesses the choice whether they use a bank which offers them services inside the ring-fence or outside
- allow for different business models, benefiting competition and the availability of products and services to businesses
- resolve problems arising from balance sheet structures at some banks which would give rise to large surpluses or deficits in funding
Increasing competition across the banking sector
On increasing competition in the banking sector, Cridland added:
“Companies want a highly competitive banking sector to help promote choice in lending and other banking services. They are concerned that the current ICB proposals do not focus sufficiently on driving greater competition and choice in the business banking sector.”
The CBI’s proposals to increase competition for business customers are as follows:
- switching should be made easier for business customers as well as consumers: the CBI recommends that the Commission encourages banks to reach an industry agreement to make transferring security between banks easier
- greater infrastructure sharing through widening the types of transactions that bank branches will execute for other banks’ customers
- encouraging non-banks and markets to play a greater role in providing financial services (for example, the use of insurance firms for long-term corporate lending, or hedge funds and private equity for investment in debt and equity instruments issued by businesses)
- the time-consuming and opaque Financial Services Authority (FSA) authorisation process for new market entrants can and must be improved
On the ICB’s proposals for retail bank capital requirements, Cridland stated: “Any retail bank capital proposals must be agreed internationally to ensure that smaller UK firms inside the ring-fence, do not face increased lending costs relative to their overseas competitors.”
A dedicated link to the CBI’s full submission to the Independent Commission on Banking can be found below