Submission on corporate separation of domestic retail banks from wholesale and investment banks

to the Economy, Business & Trade Commission of Labour’s National Policy Forum

Corporate separation of domestic retail banks from wholesale and investment banks would reduce
the risk to the UK taxpayer from further bank bailouts and would encourage competition in the
domestic retail banking market.

The Independent Commission on Banking (ICB) commented that a number of UK banks combine
domestic retail services with wholesale and investment banking operations and that the risks this
entails gave rise to public policy concerns. The ICB concluded that structural separation of
domestic retail from wholesale and investment banking activities was necessary, although it only
recommended “ring-fencing” of such activities rather than complete corporate separation.

Wholesale and investment banking is inherently riskier than domestic retail banking. Various
measures have been put in place by governments to reduce the risk in wholesale and investment
banking but its increased risk compared to domestic retail banking remains. In the UK retail
banking has become effectively a utility, comparable in necessity to water and electricity. If a retail
bank fails then the government is effectively obliged to intervene, to maintain civil order if nothing
else. Any link between a domestic retail bank and a wholesale or investment bank, even through a
“ring-fence”, increases this risk of failure and consequent effective obligation for government
intervention.

Domestic retail banks enjoy significant commercial benefits if they are in the same corporate group
as wholesale or investment banks. These benefits inhibit competition in the domestic retail banking
market.

Domestic retail banks may argue that they face increased costs of doing business if they are
completely separated from wholesale or investment banking activities. This is countered by the
argument that retail banks in the UK enjoy a significant commercial benefit from the implicit
backing of the government.

I would like to submit a proposal to prevent domestic retail and wholesale or investment banks from
existing within the same corporate group.