By Max Clarke

The CBI said today that ensuring banks can finance a private sector recovery and support future growth should be the Government’s main consideration when reforming the banking system.

In its submission to the Independent Commission on Banking consultation, the UK’s leading business group also stressed that reforms must be globally coordinated to maintain and strengthen the UK’s position as an international financial centre.

Banking and financial services play a significant role in society, so building a competitive but resilient sector, free from taxpayer support, will be crucial.

John Cridland, CBI Director-General, said:

“A healthy economy needs a healthy banking system, and the top priority must be financial stability for all.

“We must strengthen our banks for the future, without relying on the taxpayer. Improving credit flows and providing relevant financial products to businesses will be critical to drive growth and recovery.

“Financial services in the UK is a world class sector, accounting for around 10% of total economic output, so we must not jeopardise this position by acting in isolation on reforms.”

On the subject of structural reform, Mr Cridland said:

“Businesses value integrated services provided by large universal banks, so breaking up existing banks is not the way forward.

“Instead, structural reform should focus on establishing the necessary capital buffers, having effective recovery and resolution arrangements, and appropriate supervision.”

The submission makes clear that capital and liquidity reforms already underway at a UK, European and global level have and will continue to tighten requirements substantially. Building on this progress, banks need to ensure that adequate capital and liquidity is allocated to individual risks and activities.

In addition, the introduction of ‘living wills’ will help separate activity and ensure that core banking services can continue in the event of a crisis.

The CBI also supports the following structural reforms:

* Contingent capital which can help support banks’ core services on a going concern basis
* The introduction of the proposed Financial Policy Committee (FPC) to act as a highly-skilled supervisory body to spot emerging risks or bubbles
* Mechanisms which promote separation between banks — further investigation of the merits of central counterparties (CCPs) which could act as effective “circuit breakers” in reducing bilateral interbank exposures and contagion during a crisis.

On the subject of competition, Mr Cridland said:

“For business, having a good relationship with their bank is vital. There needs to be open dialogue to create trust and mutual understanding between both parties.

“Reducing barriers to entry in the banking sector will encourage diversity in products and services, and more competitive prices.

“Among the options that should be considered are greater transparency in pricing, making it easier to switch bank accounts, and sharing of branch infrastructure.”

The CBI outlined a number of options that could encourage further competition:

* Making it easier for companies to change banks if they choose to. Improvements to back office and administrative systems will ensure that the switching processes work efficiently, reducing the associated operational risk to businesses. The CBI supports the introduction of an agreement to make transferring security between banks easier, for example the existing bank guaranteeing the new bank while the transfer takes place.
* More transparency in the pricing of bank products and services is something businesses think could to help them make informed choices from a diverse range of suppliers.
* Greater infrastructure sharing between banks could help introduce greater competition to the market. It may be possible to widen the types of transactions that branches will execute for other banks’ customers, such as basic deposit taking facilities for cash and cheques.
* The time-consuming and opaque Financial Services Authority (FSA) authorisation process for new market entrants must and can be improved
* The ICB should also consider the role that non-banks and markets can play in providing financial services. For example, the use of insurance firms for long-term corporate lending, or hedge funds and private equity for investment in debt and equity instruments issued by businesses.