Britain has shot into bank regulation with the Independent Commission releasing a new report named ‘The Vickers’ report. The report consists of many significant suggestions: to start with, banks tend to balance larger assets in order to make up for the financial losses. In addition, retail and investment banking are advised to stay separated to gain the best result. Lastly, banks dealing with both retail and investments bordered the retail operations with a ‘ring-fence’ to keep safe the internal customers from a possible collapse.
Diversification is Good for Banks
Some critics have argued that the list of banking regulations in Vicker’s Report has made retail banking a moneymaking source for investment banks dealing also with retail. Without the profit made by the investment banking, the bank stock shares would have failed to perform well in the last few years. Besides, certain recognized banks of Britain like Northern Rock would have been able to cope up with the loss if its sectors had been diversified earlier.
Financial needs may be increased to provide more protection to the banks. It, in turn, may increase their costs as well. Besides, by doing so, the banks won’t be able to offer huge loans as they have to keep certain amount of liquid assets too. This will ultimately make credits costlier to people restricting its usage.
Impact of Regulations on Interest Rates
According to a statement made recently by Kevin Nixon, a Risk Advisory Partner of Deloitte, If the rates of interests continue to remain low in big markets, then insurance companies and banks have to think about their strategies again. At the same time, the banks and other financial institutions cannot overcome the prevalent economic crisis just by increasing the rate of interest.
Increased Business Cost of Investment Banks
Whether British banks will be able to cope up with the increased regulations or not is becoming a big question. One thing is for sure- the list of baking regulations will compel the British banks to stick to the requirements and make their strategies flexible. Consequently, the business cost of independent investment banks will increase. Additionally, it may also force some of the banks to withdraw themselves from the global competition.
To stay in the competition, the businesses have to adjust in the present environment. The government of the country should not come forward to safeguard those banks that are not interested in adopting a flexible strategy. ICB instructs the banks to put certain operations within the ring fence so as to keep itself away from unexpected financial crisis. ICB has also set the deadline to 2019 which means that the banks have enough time to adapt themselves to the arising needs. Hence, increasing the capital under this new structure won’t be a difficult job for the banks.
If politicians speak regarding the retail bankers, profit through trading unreserved buyers or investment banks, which have broken up these mortgages to shift a substantial amount of debt, merely whispering the word ‘bank’ is usually more than enough to make people feel extremely unsettled in the modern climate. There are few who would dispute actions need to be taken by the banks, the very specific rules and regulations that should be followed is still however going to be a slight problem.
Applying Ring-fencing Rule to Big Banks
In modern financial dictionary, the phrase, ‘too big to fail’ is gaining significance day by day. The effort given to separate investment banks from the retail ones is gaining public recognition. Ring-fencing rule should be applied by the banks having more than €25bn of deposited amount.
One of the banks that is affected heavily due to the ring-fencing rules is Barclays. To implement the new rules effectively, approximately €1bn.
To sum up, it can be said that no banks will be affected by the regulatory changes if they are using flexible banking strategies. By separating the retail from the investment banking, the banks will be able to keep the customers safe in case any unhappy financial incident occurs.
However, there are certain banks that are completely against the investment banks mainly because of its instability and lower returns. These banks think that the investment banks will never be able to make profit in a way that it will fully cover the cost of capital. As these banks are not risk-takers, they’re happy with retail banking only.