6.6 Institutional issues

Question 1

When do the government hope to sell its shares in RBS?

Answer 1

They hoped to sell them before 2015 but the sale will take much longer - the next significant sale of shares starts in 2019

Question 2

Why is the government wary of selling its shareholding in RBS too soon?

Answer 2

RBS did not make a profit after financial crisis until 2013 - its share price remains low and the government wants to ensure that it returns to the public purse as much of the funds used to bail out the bank as possible by waiting until share prices rise

Question 3

What do analysts agree to be a source of uncertainty in the selling of the government shares in RBS?

Answer 3

The absence of a timetable

Question 4

Divestment definition

Answer 4

Disposal of certain parts of their business to make them smaller and to improve competition

Question 5

What is ‘Project Rainbow’?

Answer 5

The RBS divestment procedure - they were to dispose of more than 300 of its branches and some other interests, including some insurance brands, e.g. Churchill

Question 6

Details of Project Rainbow:

Answer 6

• RBS were given until end of 2013 by EU commissioner but a sale to Santander fell through so RBS asked for extension of at least two years
• EU instead planned to revive ‘Williams and Glyn’ (a long-dormant brand) to create a new challenger bank but this was not seen as a viable separate bank after the Brexit vote
• RBS agreed to spend over £800m for business customers to switch to competitor providers

Question 7

What is the Parliamentary Commission on Banking Standards’ argument against Project Rainbow?

Answer 7

That they are insufficient - it should be split into a bad bank and a good bank

Question 8

What is ‘Project Verde’?

Answer 8

The LBG divestment procedure

Question 9

Details of Project Verde:

Answer 9

Sale to The Co-Operative Group collapsed so LBG converted 631 of its former branches into a separate bank, called TSB

Question 10

What does the new TSB bank comprise?

Answer 10

All of the Lloyds branches in Scotland and all of the Cheltenham and Gloucester branches

Question 11

What did Ed Miliband suggest in 2015?

Answer 11

• Banks had become too powerful and should be forced to give up a number of branches
• There should be a threshold limit for market share
• CMA should set a timetable for banks to sell off branches by 2020

Question 12

What were the biggest challenger banks in 2017?

Answer 12

• Atom
• Monzo
• Tandem
• Starling

Question 13

What have bankers predicted in regard to Ed Miliband’s idea to cap market share of banks?

Answer 13

It may have a perverse outcome - as banks approach their maximum size, banks would rid themselves of lower quality customers and so contribute to financial exclusion

Question 14

What banking services within the ring-fence?

Answer 14

• Current accounts and payment services
• Savings accounts
• Lending
• Trade and project finance
• Advising on and selling products from non-ring-fenced banks, where no exposures are created for the ring-fenced bank as a result

Question 15

Ring-fenced body definition

Answer 15

One that carries out one or more ‘core activities’

Question 16

What is the only core activity at present?

Answer 16

The accepting of deposits

Question 17

What does the accepting of deposits include?

Answer 17

• Opening accounts to hold deposits
• Provision of facilities for withdrawing money and making payments
• Provision of overdraft facilities

Question 18

Financial Services (Banking Reform) Act 2013 provides for the government to add to the core activities if it believes what?

Answer 18

That an interruption of their provision may adversely affect the stability of the system

Question 19

What type of provider does the Financial Services (Banking Reform) Act 2013 not include?

Answer 19

Building societies

Question 20

A ring-fenced body is not permitted to do what?

Answer 20

Carry out ‘excluded activities’

Question 21

What is the only current excluded activity?

Answer 21

A bank dealing in investments as a principal (ie on its own behalf rather than acting for another party)

Question 22

HM Treasury has powers to define other excluded activities if it believes what?

Answer 22

They could have an adverse affect on the continued provision of core services

Question 23

Under what circumstance will the HM Treasury allow a ring-fenced body to deal in investments as a principal?

Answer 23

If no adverse affect is likely to result

Question 24

What does the Financial Services (Banking Reform) Act 2013 give the PRA powers to do?

Answer 24

Force an individual banking group to separate its retail and wholesale banking completely if the PRA believes that the bank is undermining the aims of ring-fencing - known as ‘electrifying the fence’

Question 25

Arguments in favour of breaking up the banks into retail and investment arms:

Answer 25

• The bigger a bank, the more confident it is that it will be bailed out - splitting would create two smaller banks so there would be no expectation of being bailed out
• Basic retail banking services are classed as ‘utilities’ so must always be available meaning a retail bank’s funds should be protected
• Large banks are difficult to control
• May rescue bad reputation to some extent leading to confidence in retail banks

Question 26

Arguments against breaking up the banks:

Answer 26

• Inter-connectivity is a big problem which splitting banks would not solve
• Less funding directly available to retail banks from within and cost of accessing funds would rise so increased charges for borrowers
• Retail banks also played their part in the financial crisis through irresponsible lending and failing to manage risks - would be better to tighten regulation in these areas
• Large banks may feel disadvantaged so move out of London to centres where they can remain intact

Question 27

Regulatory risk definition

Answer 27

The risk involved in increasing and tightening regulation`

Question 28

Cost implications of compliance with regulation:

Answer 28

• Compensating victims of mis-selling
• Administrative costs associated with the way in which products are sold and operated e.g. more forms before a mortgage is approved
• Costs of complying with mandatory BCOBS and voluntary Standards of Lending Practice - training etc
• Employing compliance staff

Question 29

Providers react to a cost increase in ways that aim to preserve their profit margins. This could be:

Answer 29

• Raising prices either in terms of a higher interest rate or fee
• Stop granting loans to small customers

Question 30

How does regulation help to reduce differences between providers?

Answer 30

By laying down standard ways of operating

Question 31

Smaller organisations (most commonly IFAs) have sought to lighten the burden of compliance costs by doing what?

Answer 31

Banding together into networks

Question 32

How does it work when smaller organisations band together into networks?

Answer 32

• Costs of compliance are spread among the members
• In some cases adviser pays the network a set fee and receives support services, such as assistance with compliance, while retaining control over all other parts of the business
• In other cases the network has much more control and may actually own firms of advisers