A recent University Challenge featured a round on acronyms associated with the financial crisis. The team captain answered each without pause: CDS: credit default swap; CDO: collateralised debt obligation; TBTF: too big to fail.

It was this last term that was most troubling. A number of strong, resilient banks that weathered the financial crisis quite well are now lumbered with an acronym which stigmatises them because of their size and importance. In the UK – and in no other country – the agenda for banking reform is still governed by the assumption that big banks should be split up, despite the evident challenge that would present to the UK as a financial centre, and its ability to support industries.

Sir John Vickers’ Independent Commission on Banking was initially established to address this issue – to look at nothing less than the fundamental structure of the banking sector. The Commission desires to see a more resilient financial system where no bank need be viewed as too big to fail and where there is no return to the type of taxpayer support needed during the recent financial crisis. And so do we.

Sounding it out
In the coming months it will be conducting a series of hearings, looking in particular at:
• the UK banking market in comparison to the market in other major economies;
• the nature and relevance of the current reform programme;
• the relative concentration of the UK marketplace; and
• the options for structural division.
The Commission intends to put the banking industry under the spotlight and to ask difficult questions. We would expect no less. And we believe that when you look at the issues the Commission identifies, and place them against the experience of the crisis, then we have the potential for constructive solutions that take us where we ought to be. But it is essential that the Commission makes its assessment of how banking reform should progress by reference to the very real changes that are already being made. This includes both changes to the regulatory regime and developments within the marketplace, including divestments that have been planned.

A vast amount of work is being undertaken. Our retail banks – as independent research has shown – already provide customers with more choice and greater protection and offer better value for money than in other countries.

We have just seen agreement on a new capital and liquidity accord. UK banks are already holding twice as much capital as previously and several times more liquidity. Work has also been undertaken on corporate governance, accounting and risk, and we are in discussion on recovery and resolution plans and other contingent measures recognised in the report.

In competition
The banks are actively competing for customers, as they seek to attract deposits to lend to new borrowers. At the moment the cost of getting into the market, and operating in it, is very high, which obviously can discourage new entrants. But we should distinguish competition from competitiveness: for instance, there are still quite a lot of players around in the mutual sector, but many of them have not been particularly competitive in recent years. Smaller building societies all but stopped lending in the market – and indeed sold off much of their books into the banking industry.

The UK banking industry and the regulatory authorities have worked extremely hard over the past two years to make changes to the banking and financial system based on the lessons learnt from the financial crisis. This includes measures to make banks and the financial system more resilient to shocks in order to decrease the probability of bank failure and measures intended to reduce the impact in the event of failure – including improvements to recovery and resolution arrangements. These are intended to ensure we reach a point where any institution in financial difficulty can be wound-down in an orderly fashion without resorting to the taxpayer.

Which brings us back to TBTF: recovery and resolution plans work, and they have already been used in the UK. A key aspect of the Commission's analysis, therefore, should be an assessment of the progress being made on the TBTF reform programme, both here and abroad.

We believe the reform measures in hand are fundamental and can play a significant part in restoring trust and confidence in our banking system. But further work and decisions are needed: it is critical that we take the correct next steps if we are to achieve the right equilibrium between financial stability and laying the ground for an environment in which households and businesses can prosper through jobs and economic growth.

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