Parliamentary commission calls for electrified banking ring fence

A parliamentary report that looks at the effectiveness of plans to separate retail banks from investment banking operations has called for legislation to prevent breaches of the ring fence.

IT departments will play a critical role in splitting retail and investment banking operations, as systems and services contracts will have to be separated.

In December the Parliamentary Commission on Banking Standards published its first report. It looked at one of the proposals of the Independent Banking Commission’s report on reforming banks to ensure no repeat of the banking crisis.

It looked at the idea of ring-fencing in large banks. This means keeping the retail bank separate from risk-taking investment operations, such that the investment bank could fail without jeopardising the retail bank and its customers. Ring-fencing is seen by many in the financial sector as less harsh than a complete separation.

The separation plans are now expected to be completed in 2015, rather than the original deadline of 2019, business secretary Vince Cable said last year.

For IT departments this could mean individual systems will require separation, with entire IT operations and outsourcing agreements facing restructuring.

The Parliamentary Commission on Banking Standards report takes this a step further. While it supports the idea of ring-fencing, it feels the plans fall short of what is required and it calls for the “electrification of the ring fence”.

The report said: “The Commission welcomes the creation of a ring-fence. It can, in principle, contribute to the government’s objectives of making the banking system more secure. 

"It is essential that banks are restructured in a way that allows them to fail, whether inside or outside the ring fence. Ring-fencing can also help address the damage done to culture and standards in banking."

"But the proposals, as they stand, fall well short of what is required. Over time, the ring fence will be tested and challenged by the banks. Politicians, too, could succumb to lobbying from banks and others.

"For the ring fence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to.

"That’s why we recommend electrification.”