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Understanding Risk Management and Compliance, What is different after Monday, September 23, 2013 [NOOK Book]

Overview

Every time I read that banks must start 'ring-fencing' their retail operations so that they will be able to fail without endangering depositors, I remember the cold war, especially the Berlin wall.

Yes, I am an old man (born in 1959). Yes, I am feeling well.
No, there is "no doubt as to the person's state of mind" (at the time of writing this newsletter).

First, we read about...

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Understanding Risk Management and Compliance, What is different after Monday, September 23, 2013

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Overview

Every time I read that banks must start 'ring-fencing' their retail operations so that they will be able to fail without endangering depositors, I remember the cold war, especially the Berlin wall.

Yes, I am an old man (born in 1959). Yes, I am feeling well.
No, there is "no doubt as to the person's state of mind" (at the time of writing this newsletter).

First, we read about the need for a fence in banking.

The Independent Commission on Banking in UK has the opinion that: "considering forms of retail ring-fencing under which retail banking operations would be carried out by a separate subsidiary within a wider group."

The Berlin wall started with a fence too.

Then, we read that this fence in banking must be electrified ...

The Chairman of the UK Parliamentary Commission on Banking Standards, Andrew Tyrie MP, has said:

"The Government asked us to look at one of its main proposals for increasing financial stability - ring-fencing - as part of our work.

The Commission welcomes the creation of a ring-fence. It can, in principle, contribute to the Government's objectives of making the banking system more secure.

It is essential that banks are restructured in a way that allows them to fail, whether inside or outside the ring-fence.
Ring-fencing can also help address the damage done to culture and standards in banking.

But the proposals, as they stand, fall well short of what is required. Over time, the ring-fence will be tested and challenged by the banks.

Politicians, too, could succumb to lobbying from banks and others, adding to pressure to put holes in the ring-fence.
For the ring-fence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to.

That's why we recommend electrification. The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it."

They believed the same for the Berlin wall. A simple fence was not good enough. They also recommended electrification.
What is next with the electrified ring fence in banking?

If they find that the electrified ring fence "falls well short of what is required" what is next?
We can learn from the Berlin wall. There was a constant process of expansion and reinforcement on the East Berlin side, to create what gradually became a multi-layered "security" system.

1 Concrete slab wall, with or without piping
2 Wire mesh fence
3 Control strip
4 Floodlights
5 Anti-vehicle trench
6 Outermost boundary of manned area
7 Border patrol road
8 Wire guiding dog patrols
9 Signal device
10 Observation tower
11 Electrified signal fence

Self-firing devices and mines could also help.

I fear that the banking consultants of the future must have some war experience in order to be hired.

What about:
2006 - 2011: Management Consultant
2011 - 2013: Soldier of Fortune
Read more at Number 6 below, where you can find the "peer review" of the UK.

We read:

"Ring-fencing": Ring-fencing will improve the resolvability of banks and create a more sustainable banking industry.

It will insulate core banking services whose temporary disruption would have a significant direct impact on the domestic economy - in particular the taking of deposits and the provision of overdraft facilities and payments services.

Ring-fencing will also support continuity of provision of these vital core services, even where financial institutions are in trouble, reducing the perceived implicit guarantee that the Government will be compelled to step in to support failing banks that are perceived to be "too big to fail".

"Electrification": The UK Government has agreed with the PCBS that a reserve power to require banks to divest certain operations may be a powerful additional tool to guarantee the independence of ring-fenced banks within their corporate group.
This so-called "electrification" of the ring-fence will enable the regulator to split individual banks if this is necessary ...

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