Separation of Bank Retail and Investment Activities Investment banking was again in the news, just before Christmas

with the announcement by UK Chancellor George Osborne, that the British government would support the recommendations of the Vickers banking report, which include the division of retail and investment banking. The objective of this recommendation is to separate the deposits of consumer and commercial customers and ring-fence these from use by banks in investment activities.1 In recent years, several UK high street banks suffered substantial losses arising out of their investment activities and the extent of these losses was perceived as a significant threat to their survival the concept that those institutions had become too big to fail. The potential loss that would be suffered by consumers and businesses caused the government of the time to provide large-scale funding to prevent bankruptcy of the organisations affected and a subsequent destabilisation of the wider economy. The ring-fencing recommendation by Sir John Vickers intends that the separation of investments from traditional banking activities will safeguard deposits from activities that carry the potential for losses that are too great for banks to withstand. This would thus avoid the necessity for future government assistance and maintain stability within the banking sector and the wider economy. The practice of separating retail and investment activities is not a new one and was previously in operation in the United States. Following the Stock Market Crash on 1929 and the Great Depression, a similar rule was introduced with the Glass-Steagall Act.2 The rule continued until 1999, when it was repealed by the Gramm-Leach-Bliley Act.3 The latter allowed companies to combine investment, commercial and insurance activities.4 The cost of the ring-fencing and other reforms detailed in the Vickers report is estimated by the government at up to 8bn per annum to financial institutions, with a potential cost to GDP of between 800m - 1.8bn.5 However, the Chancellor insisted that these costs would be far outweighed by the benefits to the economy of a more stable banking system.6 The Vickers reforms are expected to be in place by 2019.7 This would maintain a uniformity of timeframe with the implementation of international financial rules, Osborne confirms banks must ringfence retail banking. www.bbc.co.uk. Retrieved 27.12.11. 2 Investment banking. www.wikipedia.org. Retrieved 27.12.11. 3 Investment banking. www.wikipedia.org. Retrieved 27.12.11. 4 Gramm-Leach-Bliley Act. www.wikipedia.org. Retrieved 27.12.11. 5 Osborne backtracks to spare banks full impact of reforms. www.independent.co.uk. Retrieved 27.12.11. 6 Osborne confirms banks must ringfence retail banking. www.bbc.co.uk. Retrieved 27.12.11. 7 Bank shock absorbers to weather next crunch. www.thisislondon.co.uk. Retrieved 27.12.11.
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contained within Basel III.8 A White Paper, setting out the Vickers reforms in greater detail changes is expected next spring.9 In implementing the reforms, the government was backed by the reports author, Sir John Vickers, who said, With the architecture for reform now settled, a more stable structure should now be built.10 The governments announcement was also supported by the opposition, Labour Party.

References www.bbc.co.uk www.independent.co.uk www.thisislondon.co.uk www.wikipedia.org Osborne confirms banks must ringfence retail banking Osborne backtracks to spare banks full impact of reforms Bank shock absorbers to weather next crunch Gramm-Leach-Bliley Act Investment banking

Lobbying pays off for HSBC and Standard Chartered. www.thisislondon.co.uk. Retrieved 27.12.11. 9 Banking reforms in place by 2019. www.independent.co.uk. Retrieved 27.12.11. 10 Banking reforms in place by 2019. www.independent.co.uk. Retrieved 27.12.11.
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