Background
4.This Act implements the final recommendations of the Independent Ccommission on Banking (“ICB”), established in June 2010, and recommendations made by the Parliamentary Commission on Banking Standards (“PCBS”), appointed by Parliament to consider how culture and standards in the banking sector could be improved as a consequence of the LIBOR scandal. It also makes available to the Bank of England a new stabilisation option (the “bail-in option”) under Part 1 of the Banking Act 2009.
5.The ICB published its final report on 12 September 2011. It recommended structural reform of the banking industry, together with measures designed to increase the capacity of banks to absorb losses. Its proposals for structural reform centred on the principle that it should be made easier and less costly to resolve banks which get into financial difficulties, or in other words to determine which activities of a failing bank are to be continued, and how they should be continued in an orderly process. In particular, the ICB recommended that retail banking should be separated from wholesale or investment banking, and that this should be achieved by ring-fencing, or separating, retail banking within a banking group in order to isolate banking activities where continuous provision of service is vital to the economy and to the customers of a bank. They also recommended that measures should be taken to ensure the economic independence of the retail bank from the wider banking group, and its independent governance.
6.The ICB recommended that large UK banking groups (and ring-fenced banks on their own behalf, irrespective of the requirements placed on the rest of their group) should be required to hold equity and other regulatory capital, and long-term unsecured debt (referred to as the “primary loss-absorbing capacity” by the ICB), sufficient to cover (for the largest groups) at least 17 percent of the group’s risk-weighted exposures.(1) The regulatory capital and debt forming part of this primary loss-absorbing capacity would be available to bear losses in the event that the bank failed. The ICB further recommended that deposits eligible for protection under the Financial Services Compensation Scheme should be made preferential debts in the event of insolvency.
7.The Government published its initial response accepting the ICB’s recommendations and setting out its plans for implementation on 19 December 2011 in Cm 8252 Government response to the Independent Commission on Banking. The Government developed its proposals further and set them out in a White Paper, Cm 8356 Banking reform: delivering stability and supporting a sustainable economy. This set out more detail on the policy design and was followed by a further period of consultation. The government’s proposals were intended to deliver a robust ring-fence, separating investment banking and its related activities from retail banking, in order to reduce the structural complexity of banks (making them easier to resolve in a crisis) and ensuring their independence from other parts of the group. Copies of the relevant documents, including these consultation documents, are available on the Treasury’s website (www.hm-treasury.gov.uk) and the website of the ICB (bankingcommission.independent.gov.uk).
8.A draft Bill was published on the 10 October 2012 in Cm 8453 Sound Banking:Delivering Reform. This was to enable pre-legislative scrutiny of the draft Bill by the PCBS. On 21 December 2012 the PCBS published its first report (HL98-HC848) making recommendations on the draft Bill. The Government published a response to the first report of the PCBS and this is available at www.gov.uk. On 11 March 2013 the PCBS published its second report (HL 126-HC 1012) which discussed the Government’s response to its first report and made further recommendations about the draft Bill. On the 19 June 2013 it published its final report on banking reform Changing Banking for Good (HL 27-I- HC 175-I).(2) This report made a substantial number of recommendations, many of which were for the Bank of England, the Prudential Regulation Authority or the Financial Conduct Authority. Those intended for and accepted by the Government, and requiring legislative effect, have been implemented in this Act.
9.In addition, the Act confers on the Bank of England the power to deploy a new stabilisation option called the “bail-in option” in relation to banks, building societies, investment firms and banking group companies. This will enhance the resolution toolkit, consistent with the range of tools that Member States will be required to make available to their resolution authorities under the European Commission’s proposals for a Directive establishing a framework for the recovery and resolution of credit institutions and investment firms (the “Recovery and Resolution Directive”). It also provides for a special administration regime for financial market instructure companies.
Exposures are assigned risk weights in accordance with international practice, to determine how much regulatory capital should be held by the bank.
The PCBS has also published two other reports: Proprietary Trading (HL 138-HC 1034), 15 March 2013 and ‘An Accident Waiting to Happen: The Failure of HBOS’ (HL 144-HC 705), 5 April 2013.