Key themes from the Final Report of UK Parliamentary Commission on Banking Standards

A global financial sector within a medium-sized economy

A comprehensive report, for the most part well argued and with some practical proposals for improving banking. But in some parts the Commission seems to go beyond its remit, and sets out some ideas that would be hard to implement, or could conflict with existing initiatives.

RBS
Looks watered down to seeking the analysis of a bank split which the Commission admits they do not have. They do review the key issues, though, and devote a lot of space to this. In fact it’s likely the Government wants to get EU permission to buy out the remaining bad assets, helping a sale of the rest. Something similar was done for others like Northern Rock and Dunfermline BS. There is also little point in putting the public purse behind investment banking business overseas, and probably not even in the UK. The Commission refers to assets of uncertain value or relevance to the UK. Both sides of the Coalition probably want to see the investment banking side scaled back. RBS can probably best contribute to the economy if floated soon, and the bad bank split is not necessary if the currently regulatory approach prevails (Basel, risk weights etc). It will just take time. Float would be a lot easier if the government negotiates with EC for an asset purchase and possibly at same time returns the dividend access share. The bad bank part could be £57 bn to £1 Tr, with the Commission favouring something at the lower end. They also raise the possibility of full nationalisation as a route to resolving the remaining issues, prior to privatisation. Other big European banks have similar problem assets and European politicians have no incentive to make RBS hard to resolve.

Banking the unbanked
Government to introduce statutory duty for simple accounts if the industry cannot develop its own standard for a comprehensive service. Lloyds and Co-op are given credit for leadership in this. But it is unlikely that forcing banks to work with credit unions at a regional level would deliver what The Commission wants. Some of the unbanked that the Commission wants to monitor may prefer to operate in the cash economy.

Bank sector concentration
The Commission notes that this has been a UK pattern for 50 years at least. Surely, after the folly of picking the Co-op Bank as a new force, with the collapse of both the RBS and Lloyds branch sales, competition should be driven by customer preference. In mobile phone services, and other utilities, enabling customers to move easily has helped competition. The Commission could have put more focus on empowering customers rather that trying to centrally plan an industry structure. However, it is right to note that large incumbents can calculate their own risk weights whilst new entrants must use a standardised approach.

Remuneration, incentives & culture
This was really why the Commission was set up and most of this is good. But can the regulatory style easily be changed from principles based to more rules and judgement. Not clear this would get more convictions or change in behaviour. Reckless misconduct idea might be as far as e Govermnent goes. The principles are already strong – on Treating Customers Fairly, for example- and likely that Government will broadly stick to current regulatory approach. A lot of ideas put up on enforcement but many too radical in terms of legal change to be readily incorporated in banking reform plans. Interesting proposal that the Governor should not chair the PRA. Apparently the FCA has too many objectives but another – competition – should be added to the PRA.

Governance & Whistleblowing
Some of the most useful and most easily implemented ideas are in this. It’s a core part of the Commission’s remit and the case for change is well made. It rightly recognises need for more transparency on governance by bond holders and other capital providers.

UKFI
Certainly a fig leaf, but politicians find that useful. Will they give it up?

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