The CML state:
We are urging that proposals emerging from last week’s final report from the Independent Commission of Banking should be implemented in a way that allows funding for mortgages to be raised economically and from a variety of sources, so that lending is not artificially or unnecessarily constrained.
At this stage, however, there is considerable uncertainty about the overall impact of the report’s proposals on the lending industry.
Some measures may not be implemented before 2019, the starting date for the Basel III rules. By then, however, the mortgage industry, funding markets and the wider economic backdrop will have changed significantly, and in ways that we cannot now predict.
Among the report’s key proposals are measures to safeguard individuals and small and medium-sized enterprises from the impact of any future banking crisis by ring-fencing mandatory services like taking deposits from, and providing overdrafts, to these groups of customers.
Only ring-fenced banks would have regulatory permission to provide such services.
The report also details a series of prohibited services that must sit outside the ring fence, including those related to secondary markets, the purchase of loans or securities, activities requiring holdings of regulatory capital against Basel-defined market risk, and services not provided to customers in the European economic area.
For other credit services, including residential mortgages, the ICB does not require ring-fencing. But it does expect ring-fenced banks to provide a "large proportion" of credit in order that this is protected from potential shocks elsewhere in the financial system.
The commission recognises that "the economy would suffer if separation prevented retail deposits from financing household mortgages."
The ICB recommends that there should be a limit on the proportion of a ring-fenced bank’s funding raised on wholesale markets and on its total exposure, secured and unsecured, to banks that are not ring-fenced and to other, non-bank financial companies.
The report also recognises that the UK mortgage market is currently "in a state of flux" and may be more difficult to enter in the coming years "due to more difficult funding conditions."
Reduced access to funding since 2007 has reduced competitiveness in the mortgage market, which is one of the reasons why we believe it is important to have a clear understanding of the impact of proposed reforms on both funding and competition.
The ICB recommends that competition authorities should continue to monitor the UK mortgage market.
The ICB also recommends that the new Prudential Regulatory Authority should work with the Office of Fair Trading to review the application of prudential standards.
It urges that capital and liquidity requirements should not unnecessarily limit the ability of new firms to enter the market safely and to grow, particularly for those using the standardised approach to calculating risk weights without the ability to move to an advanced internal-ratings based approach because of the cost of doing so.
We will continue to work with members on assessing the potential impact of the ICB’s proposals on the mortgage market as the government moves towards implementing them.
