On 14 June 2012, HM Treasury released the long-awaited White Paper on banking reform. The proposals follow the report issued in September 2011 by the Independent Commission on Banking (“ICB”) chaired by Sir John Vickers.
The principal aims of the proposals are two-fold; firstly to make the banks more resilient to shocks and secondly to make banks more resolvable such that, should they fail, it is in a manner that does not impact the real economy. It is intended that the proposals will curb excessive risk taking whilst creating the right environment for competition to flourish.
Most of the recommendations in the ICB report have been reflected within the White Paper proposals, however in an effort to balance stability with economic recovery, the White Paper does not include all of the suggested measures. For example, the White Paper does not include provisions to extend the leverage ratio beyond that required by Basel III.
A core recommendation which has been included is the ‘ring fencing’ of retail banking operations such that they are both economically and legally separate from ‘riskier’ international investment and wholesale banking. Such measures are intended to reduce structural complexity and make resolution easier.
Of particular relevance to the Isle of Man (and the other Crown Dependencies such as Jersey and Guernsey), ring-fenced banks would not be able to carry out any activities through non-EEA subsidiaries or branches. The Crown Dependencies do not currently form part of the EEA.
However, the White Paper does include recognition that an exemption may be granted for the Crown Dependencies by stating that “...It is possible that in the future cross-border resolution agreements with other non-EEA jurisdictions will emerge that provide resolution authorities a sufficient level of comfort that branches or subsidiaries in those countries will not present a barrier to resolution, nor an increased risk to the UK taxpayer”.
The White Paper goes on to state that the UK Government is working with the authorities in the Isle of Man, Jersey and Guernsey “...to establish the conditions under which branches or subsidiaries in those jurisdictions would be consistent with the objectives of ring-fencing”.
The exact nature of any such conditions (along with how the other proposals in the White Paper would be implemented) remains uncertain. What is certain is that change is on the horizon. When taken with wider reforms such as Basel III, there will be a significant impact on the services banks offer, how they structure their operations and their profitability.
