Salz Review - Wall Street Journal

23
Salz Review
An Independent Review of Barclays’ Business Practices
We believe that banks were not alone in experiencing such shortcomings but, in their
case, the examples were sometimes extreme and caused significant adverse effects
economically.
Legal and Regulatory Requirements
3.7 Given the special position banks have in society and the potential risks they represent
should things go wrong, politicians, regulators and central banks have developed a
series of legal and regulatory requirements. Some of these are to help minimise the
economic risks to financial stability that banks inherently pose. Bank capital, liquidity,
and leverage levels are closely monitored. Banks are also subject to extensive
reporting, governance and financial and market conduct rules. These rules impose
obligations around standards, treatment of customers, and the suitability of products
and sales processes. Collectively, they create significant complexity and cost
for banks.
3.8 The approach to financial regulation changes from time to time. For example,
deregulation in the UK in October 1986, through what was known as Big Bang,
allowed the banks (including retail banks) to increase their securities market activities
by taking on securities broking and market-making activities. Now there are
proposals to change this. Investment banking activities are considered too risky not
to be separated to some degree from retail activities. This is the case even though in
the UK the banking problems from 2007 onwards started with Northern Rock, and
later affected HBOS and Bradford & Bingley, none of which had investment banking
activities. However, the Government has had to guarantee the deposits of customers
and bail out some of the biggest banks because of systemic implications if they failed.
The implicit guarantee for banks regarded as ‘too big to fail’ is argued to have made
some banks insensitive to the risks they were taking on.
3.9 The Independent Commission on Banking has proposed that a bank’s retail activities
be ring-fenced from other bank activities, and the Treasury (in response to the
Parliamentary Commission on Banking Standards) is considering ‘electrifying’ 18 that
ring fence with the threat of full separation for banks which attempt to breach it. In
the US the repeal of part of the US Glass-Steagall Act in 1999 allowed the integration
of investment and retail banks. This deregulation is now being revised by enormously
complicated rules under the US Dodd-Frank Act. This includes the ‘Volcker Rule’,
prohibiting banks from, among other things, engaging in proprietary trading.
18 The Financial Services (Banking Reform) Bill 2012-13 was proposed to give effect to the
recommendations of the Independent Commission on Banking (ICB) chaired by Sir John Vickers. The
bill proposed ring-fencing the ‘core’ retail activities of large universal banks in order to protect depositors
and ensure business continuity. The Parliamentary Commission on Banking Standards was charged with
reviewing the legislation, and welcomed the creation of a ring-fence. However, it went a step further and
recommended the ring-fence be ‘electrified’ in order to be effective. The proposed electrification would
give regulators the ability to force the total separation of a bank’s retail and investment banking
businesses, if the ring-fence were tested too vigorously. On 4 February 2013, the same day the bill was
formally introduced in Parliament, Chancellor George Osborne publicly announced his support for an
electrified ring-fence.