15 March 2013

UK Banking Standards Commission publishes report on proprietary trading

The Parliamentary Commission on Banking Standards undertook to consider fully the ramifications and practical issues of supplementing the proposed UK ring-fence with something akin to the Volcker Rule. This report contains its conclusions and recommendations following the completion of that work.

Some of the conclusions and recommendations contained within the Report include:

1. On prudential concerns (Para 22):

Proprietary trading gives rise to prudential risks... The Commission has concluded that the prudential risks associated with banks engaging in proprietary trading are not necessarily different in kind from those associated with a range of other banking activities, many of which made a greater contribution to the recent financial crisis. However, having greater exposure to markets than is necessary for client servicing increases the potential for risks that may not be fully understood until the next crisis.

2. On cultural concerns (Para 31):

The argument that the trading function within banks, in particular the proprietary trading function, could have harmful cultural effects has been convincingly made. The Commission is concerned that the conflict of interest which can arise from a bank attempting both to serve customers and trade its own position cannot be easily managed, and can be corrosive of trust in banking no matter what level of safeguards are put in place supposedly to separate these activities. The Commission is also concerned that the presence of proprietary trading within a bank, with its potential to generate high short-term rewards for individual traders, could have a damaging effect on remuneration expectations and culture throughout the rest of the firm.

3. On the extent of proprietary trading in UK banks (Para 39):

Many of the leading UK banks have told us in evidence that they do not currently engage in proprietary trading, and a number of them agree that proprietary trading is not a suitable activity in which customer-oriented banks should engage. However, such reassurances alone cannot provide a guarantee against the re-emergence of proprietary trading over time, as public attention on banks’ activities fades, economic circumstances change and another generation of bank leaders less scarred by recent events emerges.

4. On defining proprietary trading (Para 76):

Commission has received extensive evidence from banks, and particularly from regulators and independent experts about the practical difficulties of establishing a definition of proprietary trading which meets the standard necessary to support effective enforcement. An individual proprietary trade may outwardly appear to be similar or identical to trades arising from client activity such as market-making, with the main difference relating to the intent behind the trade.

5. On prohibiting proprietary trading (Para 88):

The UK ring-fence, in its electrified form, is intended to protect core banking services by separating all investment banking activity, including proprietary trading, in contrast to other jurisdictions which are proceeding with structural reforms focused solely on proprietary trading. Given the present uncertainty about the feasibility and burden of prohibiting proprietary trading within banks, the Commission believes that it would not be appropriate to attempt immediate prohibition using the legislation currently before Parliament.

6. On the Commission's recommendations for regulatory action (Para 97):

The main UK-headquartered banks have told that they do not engage in proprietary trading at the present time and do not wish to do so. Commission therefore recommend that the PRA, with immediate effect, ensure that their regular scrutiny of banks monitors this assertion and holds banks to it. In particular, the PRA should play close attention to trading units which have characteristics such as large open or arbitrage positions and volatile revenue flows.

Full information

© Parliamentary copyright