Changing banking for good

Source: Tan Sri Andrew Sheng,

ON Wednesday, June 19, the Report of the UK Parliamentary Commission on Banking Standards was published with an intriguing title: Changing Banking for Good.

The title has a double meaning one is that its recommendations, if implemented right, will change banking for the good of everyone; the other is that it will change banking forever.

This report is important for many reasons. First, it was commissioned by both houses of the UK parliament, with membership from different political parties, and included the Archbishop of Canterbury, the head of the Church of England. Second, it addressed the UK banking professional standards and culture, ostensibly after the LIBOR rate-setting scandal, and their implications for corporate governance, regulations and government policy. Third, it complemented the Independent Commission on Banking (Vickers Report) published in September 2011 to address structural reforms in the UK banking industry.

The Vicker Report basically looked at ways of protecting retail depositors from bank failure and imposing too much burden on the tax payer. It recommended that the retail business of banking be ring-fenced through structural reform, rather than a total separation of the retail/investment banking business of large banks. Retail banking would be put under a separate legal subsidiary, and these would be required to maintain higher capital requirements higher than Basel III, the global standards.

In addition, all UK-headquartered banks and all ring-fenced banks should maintain a leverage ratio of Tier 1 capital to consolidated total assets of at least 3% (a 33 times overall leverage ratio).

The UK Government accepted most of the recommendations of the Vickers Commission, especially the principles of ring fencing and depositor preference. Large retail banks will have to hold equity capital of 10% and a loss absorbing capacity of 17% for large banks.It also accepted the principle of improved competition through easier switching of bank accounts.

This new report is about 600 pages in length, with 73 pages alone for its summary conclusions and recommendations. The key recommendations are around five themes making individual responsibility in banking a reality, especially at senior levels; reforming bank governance; empowering consumers; reinforcing the responsibilities of regulators and specifying the responsibilities of the government and parliament.

The report felt that the current system of sanctions against individuals is failing, since “there was little realistic prospect of effective enforcement action, even in many of the most flagrant cases of failure.” A new Senior Persons Regime will assign clear and unambiguous responsibilities to specific individuals, together with a new licensing regime. These persons would be judged against a single set of Banking Standards Rules, the breach of which would be subject to enforcement.

In order to align incentives better for long-term strategic value creation, the report suggested that a higher proportionof bank remuneration to be deferred to as long as 10 years, with such deferred pay being subject to cancellation in the event of individual misconduct or business downturn.