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ICB rules threaten private bank model

Last week was another turbulent one for the markets from the US to Europe. With massive uncertainty facing the financial sector it will be interesting to see how the implementation of the Independent Commission on Banking’s plan to ring-fence the assets in UK banks will pan out.

In the short term the problems in the eurozone lie in concerns over sovereign debt and the question of when, not if, a bankrupt Greece defaults on its debt.
And in the UK, with growth struggling to scrape above 1%, the structure by which banks do business will be relatively irrelevant if the economy, consumer confidence and growth don’t recover in the next few years.

“Anything that restricts the number of lenders in the market further is cause for concern”

By comparison then the ICB’s final rulings present no great dilemma for major banks, all of which have amended their rhetoric towards the ICB from hostile to welcoming. However, the restrictions that the ring-fencing plans could potentially place on private banks is a worry.

As several industry experts explain in this month’s Lending Zone cover feature on page 26, the current rules seem to indicate that individuals and small and medium-sized enterprises will be prohibited from banking with any entity other than a ring-fenced bank.

While it’s great that the ICB is looking to create relatively stable organisations and hopefully put the boring back into banking anything that restricts the number of lenders in the market further is cause for concern.

The private bank model, under which lenders invest in the borrower rather than in any asset they are looking to acquire, has been a key source of finance in the downturn for those with enough personal wealth to capitalise on this lending philosophy.

In an era when ’computer says no’ has encapsulated the experience of many borrowers seeking finance on the high street, anything that restricts alternative approaches such as that espoused by private banks would be a significant loss.

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