Independent Commission ICB on Banking Final Report Recommendations September 2011 Independent Commission ICB on Banking Final Report Recommendations September 2011 Official versions of this document are printed on 100% recycled paper. When you have finished with it please recycle it again. If using an electronic version of the document, please consider the environment and only print the pages which you need and recycle them when you have finished. © Crown copyright 2011 You may re-use this information (excluding logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit www.nationalarchives.gov.uk/doc/open-government- licence/ or e-mail: [email protected]. Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. Any enquiries regarding this publication should be sent to: Independent Commission on Banking Victoria House Southampton Row London WC1B 4AD This document is also available from our website at http://bankingcommission.independent.gov.uk/ ISBN 978-1-845-32-829-0 Produced by the Domarn Group, London. Final Report Contents Contents ...................................................................................................................... 1 List of acronyms .........................................................................................................5 Executive summary ...................................................................................................7 Chapter 1: Introduction ..........................................................................................19 Background..........................................................................................................................19 Outline of this report ........................................................................................................20 PART I: FINANCIAL STABILITY Chapter 2: Overview ...............................................................................................23 The Commission’s approach ..........................................................................................23 Structure ...............................................................................................................................24 Loss-absorbency ................................................................................................................27 An overview of the reform package ...........................................................................29 Chapter 3: Retail ring-fence ...................................................................................35 Purpose of the ring-fence ...............................................................................................35 Location of the ring-fence ..............................................................................................36 Height of the ring-fence ..................................................................................................62 The structure of banking groups .................................................................................76 Chapter 4: Loss-absorbency ..................................................................................79 Introduction.........................................................................................................................79 Overview ...............................................................................................................................80 Should banks have much more equity? ....................................................................86 Loss-absorbing debt .......................................................................................................100 How much loss-absorbing capacity do banks need? .........................................110 Recommendations ..........................................................................................................121 Chapter 5: Economic impact and implementation .........................................123 Introduction.......................................................................................................................123 Economic benefits of reform .......................................................................................124 What are the economic costs of reform? ................................................................133 Quantifying the costs and benefits ...........................................................................139 Competitiveness ..............................................................................................................145 Government shareholdings .........................................................................................147 The pace of economic recovery .................................................................................148 Implementation ...............................................................................................................149 Independent Commission on Banking | 1 Final Report PART II: COMPETITION Chapter 6: Overview .............................................................................................153 The Commission’s approach to competition issues ............................................153 Problems of competition and choice in retail banking .....................................154 Responses to the Interim Report .................................................................................155 Summary of competition recommendations ........................................................156 Financial stability and competition...........................................................................158 Chapter 7: Assessment of the market ................................................................165 Introduction.......................................................................................................................165 Concentration in UK banking markets .....................................................................166 Barriers to entry ................................................................................................................171 Switching and choosing providers............................................................................179 Pricing and transparency ..............................................................................................187 Importance of challengers ...........................................................................................192 Summary ............................................................................................................................197 Chapter 8: Competition recommendations .....................................................203 Market structure ..............................................................................................................203 Conditions for consumer choice: switching and transparency ......................218 Pro-competitive regulation..........................................................................................227 Market investigation reference ...................................................................................230 PART III: RECOMMENDATIONS Chapter 9: Recommendations ............................................................................233 Retail ring-fence ...............................................................................................................233 Loss-absorbency ..............................................................................................................237 Competition ......................................................................................................................239 GLOSSARY AND ANNEXES Glossary ...................................................................................................................243 Annex 1: Summary of responses to the Interim Report ..................................253 Financial stability measures: structure .....................................................................253 Financial stability measures: loss-absorbency ......................................................254 Competition measures ..................................................................................................254 Competitiveness ..............................................................................................................255 Annex 2: Other financial stability and competition reforms .........................257 Financial stability .............................................................................................................257 Competition ......................................................................................................................266 Other workstreams .........................................................................................................267 2 | Independent Commission on Banking Final Report Annex 3: The economic impact of the Commission’s financial stability recommendations ................................................................................269 Introduction and summary ..........................................................................................269 The economic importance of banks and the costs of banking crises ..........270 The effects of the recommendations on the banking system ........................272 Government guarantees of bank liabilities