THE North East may feel a long way from the London centre of financial services but banking reform will have critical impact on most business.
The CBI is calling on the Independent Commission on Banking (ICB) to undertake a rigorous cost-benefit analysis of its proposals on bank ring-fencing, as it remains unconvinced that the policies will support the recovery.
In its submission to the ICB, the CBI said more work is needed to show that current plans on ring-fencing and stability do not either lead to riskier lending within the ring-fence, increase leverage in the system, or become pro-cyclical making future crises worse.
The CBI submission also says that capital reforms must be agreed internationally, so as not to damage UK competitiveness, and it encourages the ICB to focus on competition in the business banking sector, not just retail consumers.
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.
The CBI says that a flexible approach to ring-fencing, 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.
We do not believe the commission has made a sufficiently strong case that the ring-fencing proposals will achieve their objectives. They should not proceed with the idea unless it stands up to a rigorous cost-benefit analysis.
All banks have unique business and funding models. If the Commission 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.
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.
:: Sarah Green is regional director of CBI North East
