11th April 2011
While the commission, chaired by economist Sir John Vickers, stops short of breaking-up the banks to avoid future taxpayer bailouts, it sets out far-reaching reforms aimed at greater financial stability.
To avoid another financial crisis, these include banks increasing capital reserves to protect savers, increasing competition in the sector, and ring-fencing banks' retail arms from their investment arms.
This means vital day-to-day banking services could continue even if the more risky parts of a bank failed, protecting depositors' money.
In particular, the commission singled out the merger of banking giant Lloyds TSB and HBOS in 2008, criticising Gordon Brown for pushing ahead with Lloyds' rescue of HBOS. The deal involved billions of pounds of taxpayers' money being used in support.
The report recommended that the part state-owned lender sell-off more than 600 branches to increase competition, and reduce its 30 per cent share of the current account market.
Deputy Prime Minister Nick Clegg "warmly welcomed" the interim report, saying it confirmed that the "status quo is untenable".
Commenting on the ring-fencing recommendation, the Liberal Democrat leader says: "It is based on the insight that many people share, which is that it is not right to have very high risk and very low risk banking activities so intertwined so that when something goes wrong it is the taxpayer that picks up the bill."
However, consumer groups believe the report fails to reach far enough – and that more action is needed to provoke fundamental change and avoid any costs being passed on to consumers.
Mike O'Connor CBE, chief executive of Consumer Focus said: "We need a root and branch reform of financial products which are so complex that customers simply do not trust or engage with them."
Chief executive of consumer group Which?, Peter Vicary-Smith, adds: "We welcome the intention to ring-fence the retail banking services we rely on every day, but banks mustn't be allowed wiggle room to avoid fundamental change.
"Banks must be allowed to fail without bringing down the rest of the economy and we must never again be faced with a situation where consumers pay the price for the failures of the banking system."
More work needs to be done on the precise legal framework that is used to wind up banks that have failed, says Prof Philip Booth, Editorial Director of the Institute of Economic Affairs. "A competitive market requires banks to fail and their orderly failure should be the key objective of reform.
"While some measures suggested in the report are welcome, the ICB focuses too much on regulatory mechanisms to ensure that banks have sufficient capital to prevent failure."
The ICB has to write its final report, due in September, and the government has to decide whether to accept the proposals. There is a long way to go before any of these recommendations are made reality.
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