The Canary Wharf financial district in London. As expected, the final report of the Vickers Commission said legislation to enact the reforms should be passed as soon as possible.TOBY MELVILLE
Britain's banks face an annual bill of as much as £7-billion ($9.5-billion) to comply with the reforms of the Vickers commission, according to the panel's final report into the reform of banking in the U.K., published on Monday.
As foreshadowed, the central recommendation of the Independent Commission on Banking, chaired by Sir John Vickers, is that banks' core operations -- including consumer deposits and small business lending -- must be ringfenced from the rest of their businesses. The ringfenced entity must also have its own board of directors.
The news hit bank stocks hard in early London trading, with Barclays down 4.9 per cent to £1.37 and Royal Bank of Scotland 3.3 per cent lower at £0.20. Overall, the FTSE 100 blue-chip index was down 121 points or 2.3 per cent at 5,093.4, with the banking sector falling 2 per cent.
But in a crucial concession to the wide spread of business models among the banks, the commission will not dictate where each institution must place the ringfence, instead allowing lenders and their customers a degree of choice, notably in relation to corporate deposits.
That flexibility is likely to be welcomed by the country's big global banks -- Barclays, RBSf Scotland and HSBC -- which had feared their operations would be divided along arbitrary lines.
On capital, the commission held to its interim conclusion from April that the ringfenced entity must maintain equity capital equivalent to 10 per cent of risk-weighted assets.
But it also said banks must maintain further loss-absorbing capital, such as bail-inable bonds or contingent convertible bonds (so-called "Cocos"), of a further 7-10 per cent of RWAs.
However, people close to the commission said that would be academic for the banks, which already had between 15 and 25 per cent of such capital.
As expected, the final report said legislation to enact the reforms should be passed as soon as possible, and that banks should move quickly to comply, but a timeframe of as late as 2019 should be allowed to meet the capital measures. That tallies with the deadline of the new global Basel III rules on capital.
George Osborne, chancellor the exchequer, said: "John Vickers himself sets out a timetable and I intend to stick to his timetable. So he says let's have all the changes in place by the end of this decade.
"There are a lot of changes involved, that is why it will take some time, but let's get the legislation through in this parliament and we have a commitment to legislate to get the rules in place..and then it will take some time for the full rules to come in to place," Mr. Osborne told Sky News.
The Vickers commission was set up more than a year ago, with the dual aim of making Britain's banking system safer -- and thereby reducing the distorting effect of a government guarantee -- and boosting competition between lenders. Its conclusions -- assuming they are implemented -- will constitute the biggest sweep of structural changes to the banking sector in decades.
The cost impact of the changes -- which the commission estimates at £4-billion-£7-billion -- will mainly be the result of higher funding charges for the banks' operations that are left outside the more highly capitalised ringfenced entity. In the eyes of investors, operations outside the ringfence will lose the benefit both of a government guarantee and of a broad bank's current diversification.
On competition, the ICB will move to create a strong new challenger in high-street banking by recommending that branches being sold by Lloyds are attached to an established rival. It will also force banks to provide more details on charges.
Mr. Osborne and Vince Cable, business secretary, will both endorse Sir John's report. Last week they agreed with British Prime Minister David Cameron that its main recommendations should be passed into law in this parliament, although implementation would take longer.
The efforts to restructure Britain's biggest banks have wide public support, according to the results of the latest Financial Times/Harris survey. Of those polled, 51 per cent of people in the U.K. believed banks such as Barclays, RBS and HSBC should be forced to separate their traditional high street and commercial lending operations from investment banking activities.
The British Banking Association said: "UK banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by U.K., EU and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained.
"The ICB's recommendations cover the same important issues. Any further reform measures adopted by the UK authorities need to be carefully analysed and compared with those agreed internationally. It is vital that the full impact any further reforms will have on the economy, the recovery and banks' ability to support their customers in the UK is understood."