Radical proposals to reform the UK banking industry could result in major financial institutions restructuring their leasing divisions and raising charges for asset finance, experts have predicted.
In its eagerly-awaited interim report published on 11 April, the Independent Commission on Banking (ICB) recommended that the UK’s largest banks should be required to hold a larger capital cushion to protect against losses. The commission also recommended that banks’ retail arms should be ring-fenced from investment banking divisions to make financial institutions safer and more robust.
The proposed shake-up would increase costs for banks and encourage them to look for savings outside their core business – such as leasing, according to some consultants.
Derek Soper, chairman of IAA-Advisory, an asset finance and banking consultancy, said banks may bring their leasing subsidiaries back into their retail banking branches as part of a cost-saving drive.
“I think banks will deliver leasing via corporate banking services in their branches,” he said. “Running separate leasing subsidiaries is an expense. Banks want efficiency and to save costs.”
Colin Tourick, chief executive of asset finance consultancy Aisby and Company, said retail banks may increase their leasing charges to business customers to help offset the expense of higher capital requirements recommended by the banking commission.
“As a leasing industry specialist we should be concerned by anything that increases the cost lessors need to incur when doing business,” Tourick said. “It does seem that these costs will rise, whether the lessor in question is part of a bank or is using funds provided by the banking sector.”
Leading banks – including HSBC, Santander, and Barclays – declined to comment on the ICB report. A spokeswoman at the Finance and Leasing Association said it would discuss the implications of the report with its members at a meeting later this week.
Key proposals of the banking commission report
The ICB stopped short of recommending that banks should be broken up. Instead, it suggested that retail banking should be ring-fenced from riskier investment banking divisions. This could be done by creating a separate subsidiary within a wider group.
The UK’s big retail banks should have to hold more equity capital to absorb potential losses. The minimum new capital level would be 10 percent of all loans — well above the 7 percent required by Basel III international rules introduced last year.
The ICB is due to publish its final report in September 2011.