By Max Clarke

The Institute of Directors have responded to this morning’s Independent Commission on Banking final report, welcoming its initiative.

“Many of our members will welcome the most radical reform of the banking system in a generation,” commented the Institute’s Director-General, Miles Templeman. “The attempts to improve competition in banking will be particularly welcome.”

However, the Institute, matching similar concerns raised by the Confederation of British Industry, question quite how effective the regulations will be, pointing out that the single biggest threat to the UK’s fiscal stability- the ‘too big to fail’ investment banks, which have not been addressed in the extensive, 350-page report.

Continued Templeman: “The proposals to ring-fence retail operations and increase capital requirements are clearly intended to reduce the fiscal risk from a future financial crisis. However, the proposals only slightly reduce the risk of a future financial crisis. The problem of 'too big to fail' investment banks remains the elephant in the room. There are also doubts about whether these reforms would insulate the UK’s banking system from harm if a major bank failure occurred outside the UK.

Others, notably Neil Bentley of the Confederation of British Industry, note that the significant burden that introducing ring fencing to banking will raise the cost of retail banking. This will firstly increase the cost of lending, further delaying the much needed recovery; and more significantly will make UK banks less competitive than those of countries that do not introduce similar reforms.

“There is also considerable uncertainty as to what the impact of the proposals will be on the cost of borrowing for consumers and business. The final report provides some reassurance here, but there can be no doubt that higher capital requirements will push up the cost. The issue is how much.

“Other concerns relate to the timing of the implementation. The Commission recommends the changes should be implemented by 2019. We think this is sensible. Monetary growth over the coming years is likely to be very weak and so early implementation of tighter rules on capital would not be helpful. Money supply growth needs to be much stronger than at present before full implementation can be safely carried out.

“A final concern relates to the impact of the proposals on the competitiveness of the City and the future of London as the world's leading financial centre. We need to have much greater clarity on this issue before any legislation hits the statute book.”

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