The Great Debate UK

How will banks respond to a new world?

-Jeremy Edwards is Head of Banking & Financial Services at Firstsource Solutions. The opinions expressed are his own.-

The recent publication of Sir John Vickers’ International Commission on Banking (ICB) finally gave the banking industry a glimpse of the long-promised change in regulatory regimes following the global financial crisis. The report comes at the same time as a torrent of new regulations and legal changes: the recent High Court ruling on the misselling of payment protection insurance (which is estimated to cost the banks £8 billion), the Treasury report on financial regulation, and the Basel III regulations that will force banks to hold greater liquidity. If adopted, many of these recommendations will create unprecedented change for the banking industry.

Though some of Vickers’ recommendations were less dramatic than expected, all of these changes point in one direction: banks will be faced with increased costs to meet new regulations and will have to operate in a much more competitive market.

One key recommendation of the ICB report is that banks such as Barclays, HSBC and Royal Bank of Scotland, that combine investment and retail banking, will have to maintain a “firewall” between these operations. Since they will no longer be able to cross subsidise their operations, banks will face increasing costs. Similarly, the recommendation that banks maintain 10% of their profits as a capital reserve will have an impact on profitability. Efficiency savings will need to be made if banks are to maintain their margins