The UK’s Independent Commission on Banking has proposed a dichotomy of British banking into retail and investment banking sectors with a separation between the two in order to avoid situations in which the retail side of the bank is made illiquid by the investment side of the bank thus leading to bailouts and ‘too big to fail’ philosophies. By keeping the different sectors separate, social stability can be enshrined in the maintenance and oversight of retail banks while investment side banks can be allowed to fail if they are overly speculative in nature, as was the case with many of the banks wiped out by the 2008 financial crisis. The ICB advocates for the separation of retail and investment banking based upon the assumption that the insulation of the retail sector from the investment side will give banks a greater capacity to absorb loses, with oversight and regulations being totally separate for each division. Proposals call for a minimum equity cap of10% with an additional 7%-10% of risk absorption capital. Banks will be given the ability to determine which fits into which division, such as placing corporate finance in the investment or retail side of operations as well as sharing some infrastructure. The goal is that, if the investment side of the bank were to go sour, that the containment of its losses would prevent the spread of financial crisis to other sectors of the economy. The other concern is the competitiveness of British banks in the international markets which the ICB sees as being greater under a separated system of retail and investment operations. You can find the report here, as well as live blogging and discussion from the Financial Times.
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