- Fundamental restructuring required to essentially create banks within banks
- As return on equity constrained, most costs will be passed onto consumers
- Likely to see a return to 1940s style ‘simple’ banking
Commenting on the final report from the Independent Commission on Banking (ICB) released today, Jon Pain, co-head of KPMG’s Regulatory Centre of Excellence in Europe, commented:
“The ICB recommendations are only one small step short of full Glass-Steagal separation of retail and investment banking in calling for operational, economic and legal separation. While this may improve safety of retail banks, it is ‘game changing’ for bank structures and will come at a cost. In many respects we are seeing a return to a more simple 1940/50s style of retail banking where it is perceived as more of a basic utility with low return on equity for shareholders.
“To comply with the ringfencing requirements outlined in today’s report, banks will need to fundamentally overhaul their business models. Essentially banks will need to create another bank within their bank with new boards and systems. This will come at a significant cost and the challenge for banks is to get this right in the first instance as it will not be easy to undo.
“The biggest surprise from today’s report is the doubling of capital requirements although it is not clear how this relates to CRD4. Retail banks will need to reassess whether they can make sufficient returns and will need to fundamentally rethink their business model and the subsequent costs for retail and SME customers. This in turn may accelerate the end of free banking in the UK. Equally new entrants will need to assess carefully the attractiveness of entering the market in this ‘new world’ of retail banking.
“The report is also littered with scope for additional regulation and competition responsibilities of the Financial Conduct Authority. Questions also remain over the exact details of what is permissible under the ringfencing requirements. The industry awaits Treasury’s clarification on both this issue and the exact timeframes around implementation.”
Notes to editor:
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