Charity Management

Banking reforms bad for charities, say voluntary sector leaders

21 September 2012

Plans to reform the banking system will cost charities millions of pounds by laying them open to devastating losses in the event of a bank collapsing, a coalition of major voluntary sector leaders have warned

In its final report, published on 12 September 2011, the Independent Commission on Banking[1] proposed radical changes to the way banks authorised in the UK structure themselves and manage their retail banking activities. If fully implemented, these recommendations will have a fundamental impact on the UK domestic banking market and UK universal banks’ role in global investment banking markets.
The recommendations, along with the European Capital Requirements Regulation, higher capital requirements for trading activities and the G20’s agenda for over-the-counter (OTC) derivatives will lead many mid-sized and most large banks to reassess what business they take on, their growth strategy, capital structure and legal entity arrangements.
The Charity Finance Group (CFG), the National Council for Voluntary Organisations (NCVO), Charities Aid Foundation (CAF) and the Association of Chief Executives of Voluntary Organisations (ACEVO) said proposals would increase risks for charities by leaving them with very little protection if a bank collapses.
They warned the plans would cost charities millions of pounds by forcing them to keep their money in low interest accounts, and spend more on financial advice to try to minimise risks. A joint submission to ministers calls on the government to grant charities ‘preferred creditor’status in the event of a bank collapse – which would ensure charity deposits have priority alongside those covered by the Financial Services Compensation Scheme. Such a move would ensure charity bank deposits have additional protection – without any extra cost to the taxpayer.
Charities hold around £18bn in cash deposits to provide services and to meet their commitments. Losing money as a result of a banking collapse would leave charities devastated and severely affect the support they can offer to some of the most vulnerable people in society.
Caron Bradshaw, CEO, CFG, commented:  “The stated aim of the white paper is that in the event of bank failure, losses should be borne by those best able to understand risk and who can absorb loss best. While the government’s reforms are extremely welcome and a safer banking environment can only be a good thing for charities and society generally, the changes and their impact on charities sadly have the effect of undermining this aim."
She continues: “The standard of financial management in charities is excellent, however, managing banking risk is a very niche skill and the banking crisis taught us even the most diligent of trustees can’t anticipate all catastrophes. We are hoping that government take our concerns onboard and adopt measures which take into account the unique position of charities with regard to activity and funding.”
Sir Stuart Etherington, CEO, NCVO commented:   “We are concerned that the proposals don’t take into account the nature of charity funding. To effectively undertake projects and ensure financial sustainability charities hold high levels of cash relative to their size – Tearfund, for example, the large international development charity, operates in 35 countries and needs to hold significant deposits at all times in order to do so. Charities have too much at stake to face these additional risks.”

The ICB’s key proposals

UK retail ring-fencing
The ICB concluded that the best way to prevent another financial crisis was to separate retail banking operations from investment/wholesale banking functions, effectively creating a ring-fence around personal and SME deposits and overdrafts. The aim is to provide continuity of service to those more vulnerable customers, while allowing the banking group’s activities outside the ring-fence to fail in an orderly fashion.
Under the recommendations, the largest ring-fenced UK retail banks will be required to hold equity capital equivalent to 10% of their risk-weighted assets (RWAs). They will also have to hold capital equivalent to an additional 7-10% of RWAs in the form of primary loss-absorbing capital.
Bail-in and depositor preference
The report recommends that the UK resolution authority should have a statutory power of bail-in (to recapitalise banks in resolution) and that insured deposits should have preferred creditor status.
The ICB called for improved processes for customers to switch accounts and greater transparency so that customers can compare prices. The proposals may also create opportunities for non-UK banks to compete in the British retail banking market and could inhibit UK investment banking operations in competing globally.
Structural reform
Under ring-fencing, banks will be required to create separate standalone subsidiaries with their own governance arrangements. There will be limits on their financial and operational links with investment or wholesale banking entities in the wider group. The ICB has allowed flexibility over the positioning of other activities such as the corporate loan book.

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