The Treasury's response to the Parliamentary Commission on Banking Standard's investigation, published last week, was largely greeted with relief in the City with share prices on banks soaring. But the news wasn't greeted so warmly in all circles. Andrew
Tyrie who heads up the PCBS criticised the legislation presented by the Government to “electrify” the so called ring fencing of investment banking and retail banking operations, calling it “so weak as to be virtually useless.”
The Government had initially welcomed proposals to give regulators the power to break up banks if they breached certain regulatory protocols, but the legislation presented to MPs has fallen short on a number of fronts, according to Tyrie.
The Government has a tricky path to tread. On one hand, they have to impose some authority on the banks to corral the type of behaviour that created the global financial crisis in 2008. On the other, banks are pivotal to economic recovery and the Government
is taking a wary view of anything that might trip them up.
And would ringfencing scupper the banks? If they breached protocol, then it undoubtedly would. This type of reactive business restructuring is something the banks are used to conducting, although probably not on this scale. Regulatory reform has rarely been
off the top of the banking boardroom agenda in the last few years. Restructuring a business – and ring fencing would mean hiving off banking divisions - would not be not a lightweight undertaking.
As we see with our banking and insurance clients, the complexity in delivering a restructuring programme such as ringfencing comes in the sheer breadth of the project. Typically a restructuring programme will have legal, regulatory, operational, technical
and human resource requirements. The restructuring will have an external impact as well, affecting stakeholders like shareholders and customers, in addition to the internal audience. All of these different elements would have complex interdependencies, but
they all need to be brought together cohesively in order to facilitate delivery. The banks would have to continue to operate business as usual.
Of course, all of this would be massively costly. And this is probably the Government’s main reason for wearing kid gloves. The Government is desperate for banks to start lending and continue to be amongst the largest of UK employers. The threat of ringfencing
would be too much for some, causing them to pull out of the UK market, as some banks have warned.
So has the Government promised too little by way of ringfencing legislation? Well, that depends what side of the fence you sit. But for the banks, they must be breathing a little more easily at night, knowing that this enforced restructure is no longer the
threat it could have been.