Clifford Chance

The View from Clifford Chance - The Independent Commission on Banking

Welcome to the latest edition of The View, where Clifford Chance partners share their thoughts on hot topics in the media.

With the Independent Commission on Banking due to report on Monday, Clifford Chance partmers Simon Gleeson and Oliver Bretz share some of their insights below.

If you'd like to hear more, please contact a member of the PR team, contact details can be found below, on the right hand side. We'd welcome any feedback or suggestions of topics to be covered in the future.

The Independent Commission on Banking

The Chancellor tried to take the politics out of banking reform by appointing the Independent Commission on Banking (ICB). However, Monday's unveiling of the commission's interim report will be a highly political event.

The ICB should look beyond obvious remedies and think about how institutions and consumers really behave in making its recommendations for financial stability and competition.

Financial stability

To support financial stability, the ICB will recommend structural separation of retail depositors and investment banking. However, this is unlikely to work in practice.

• No one believes a retail bank can survive the failure of the holding company
• Legal structures cannot disentangle the various systems that comprise a bank
• Narrow banks will be able to make the same decisions that brought Northern Rock and others close to collapse

The key to preventing another crisis is regulators who monitor risk continuously.

Simon Gleeson said: "A bank is a bunch of systems with a legal structure on top. It isn't practicable to say that one part or another is a subsidiary. It's like telling someone to divide their body in half."

Competition

Market dynamics are more important than market concentration in promoting fairness and competition. A fragmented banking system on its own does not make banking cheaper or fairer. In fact, merger controls are likely to allow bigger banks and the emergence of European national champions.

In the UK, "free if in credit" (FIIC) banking is the norm but this requires the often vulnerable minority who pay to subsidise the majority.

The ICB should promote transparency and encourage switching by eliminating this cross-subsidy. This is politically unpalatable because it will make services more expensive for most people.

People do not like opening and closing accounts. The ICB should let people keep their existing current account after opening a new one and cut paperwork and checks to allow instant opening.

Easy switching requires expensive system upgrades by the banks. The ICB should recommend a "switching interchange" fee paid by the bank receiving the new customer to finance new systems.

Oliver Bretz said: "If retail banking costs were transparent and consumers could vote with their feet it would provide a powerful economic incentive. Requiring banks to charge the real price of current accounts would be fairer and more effective than forced branch sell offs."