Independent Commission's Recommendations Satisfy Many of the

¶ … Independent Commission's recommendations satisfy many of the criteria specified in the Saunders-Walter paper. However, many others are not satisfied, and many people feel as though any fix based on the IC recommendations would only represent a partial fix. This is precisely where the recommendations will eventually fail the UK banking sector completely and will not allow for the complete isolation of the individual retail banking customers from the downside risk associated with commercial and investment banking.

First of all, the IC recommendations call for structural separation of the retail banks from the investment and commercial banking sectors (ICB, 2011). This should help to isolate these retail banks from potential financial crisis or collapse if the commercial or investment banking sectors fail or crash themselves. Tis is similar to what the U.S. did after 1933 when they isolated the commercial and private banking sectors to insulate them from financial ruin.

Europe on the other hand did not follow suit in the 1930's, and were left with a much more universal banking architecture. This has made them much more vulnerable to systemic shocks than the U.S. system used to be. However, in the 1980's, the U.S. system became much more like the European system after the repeal of the Glass-Steagall Act.

Secondly, the IC recommendations show that the retail banks should be put on the outer rings or fringe of the banking system, which means they are not totally separated from investment or commercial banks but they do not have the same responsibilities in terms of bearing the risk for the public the way that U.S. taxpayers bear risk for commercial and investment banking actions through the potential for bailout money due to the "too big to fail" status (ICB, 2011).

In helping to create a buffer between retail and investment banks, the IC report recommended that the retail banks keep a 17-20% primary loss absorption buffer. This means that they will capitalize themselves adequately enough to ensure they do not feel the negative effects of a potential financial meltdown in an unrelated banking sector.

However, from a skeptical standpoint, the banks that re best able to hide this 17-20% on their balance sheets but who are able to cheat the system so to speak and allow this money, which would have gone un-used in their investment banking arm, to be used to back commercial loans or investments, will have an advantage. It is clear that without total separation, as happened in the U.S.

In 1933, the banking sectors have an incentive to hide bad assets or commercial banking loans off the books in order to keep up the appearance of the 17-20% buffer (Saunders and Walter, 2011). This only encourages practices that led to the financial crisis in the first place. Also within the protected ring of separation are the services that are imperative of individuals and small businesses.

Tis is an excellent start, meaning that these groups should not be expected to back the risky behavior of an investment bank, especially when they lose money or are hurt by financial crisis. However it is only that- a good start. If these services and deposits re not safeguarded against the use by investment banks completely, it is only a half step in the right direction.

If the net banking crisis is worse than the IC foresees, that 17-20% may not be enough to keep the retail banks and therefore individuals and small businesses safe. The Saunders-Walter paper (2011) also points out that transitioning from one set of banking regulations and architecture to another carries with it inherent inefficiencies which will ultimately be passed down to the individual.

In order to minimize this risk, the IC recommendations call for a final implementation year of 2019, giving each bank ample time to minimize the transition risks and costs associated with partially separating the investment banks from the retail banks (ICB, 2011). The IC recommendations also call on each bank to do their part to protect UK interests and banks, as the recent financial turmoil is no excuse to put off reform any longer.

This goes with much of the criteria of the Saunders-Walter paper in that they recommend that when a system does not work, it is imperative to begin fixing that system at once, avoiding further costs and risks associated with such a transition. Another criteria of the Saunders-Walter paper (2011) are that derivatives and secondary markets activities should be separate from the private or retail banking sector.

The IC recommends this to occur, adding that any non-European trading activity should also be outside of the UK retail banking ring established as a barrier to protect these banking entities and their customers (ICB, 2011). This recommendation will certainly help to mitigate any downside risk for individual depositors at the retail banks. One place where the IC recommendations do not follow the criteria of the Sunders-Walter paper is within the realm of commercial deposits and lending to large companies outside the financial sector.

The IC recommendations state that this type of activity should be allowed to occur within the ring of separation (ICB, 2011). This recommendation, as shown within the Saunders-Walter paper, led to massive chaos and risk being injected into the retail-banking sector during the global financial meltdown of 2008 and 2009. One of the most basic characteristics of the U.S.

banking architecture immediately after 1933 was the fact that commercial deposits and lending to large companies was separated from the universal banking structure in order to insulate the individuals and small business owners from the downside risk of a similar crisis Saunders and Walter, 2011). It may very well be that this recommendation, one that goes against the criteria set forth by the Saunders-Walter paper, is a compromise between the regulatory commission and the banks themselves.

The banks are looking to spread the downside risk out as much as possible, over many different types of depositors in order to use as much of their deposits as backing for the investment and commercial banking interests and activities. This recommendation is certainly not in line with the separation of the banking entities, yet it is par for the course given that total separation is not recommended by the IC, and that only a 17-20% buffer be created to insulate the small customers.