By Simon Miller

The CBI has urged the investigation into the future of UK banking to look at central counterparties (CCPs)and warned that UK banks should keep intact.

In its submission to the Independent Commission on Banking consultation, the business group urged further investigation into the merits of central counterparties which could “act as effective ‘circuit breakers’ .

It said: “For example, [CCPs] can be effective in reducing bilateral interbank exposures and contagion during a crisis.”

However, it also warned that the design of CCPs had to be approached carefully as “as some CCP frameworks can increase overall counterparty risk and the determination of whether certain assets are eligible as initial margin can affect demand”.

The CBI also said that the introduction of ‘living wills’ will help separate activity and ensure that core banking services can continue in the event of a crisis as well as contingent capital which can help support banks’ core services on a going concern basis.

In addition the CBI said the introduction of the proposed Financial Policy Committee should act as a highly-skilled supervisory body to spot emerging risks or bubbles

The confederation said that companies valued the services provided by large universal banks “so breaking up existing banks is not the way forwards,” according to its director general John Cridland.

There has been growing calls for banks’ investment businesses to be separated from their retail-side but Cridland said reforms should look at adequate safety measures to avoid collapses such as Northern Rock.

“Instead, structural reform should focus on establishing the necessary capital buffers, having effective recovery and resolution arrangements, and appropriate supervision,” he commented.

The CBI said its submission made clear that capital and liquidity reforms already underway at a UK, European and global level had and would continue to tighten requirements substantially and added that banks needed to ensure that adequate capital and liquidity is allocated to individual risks and activities.

Cridland commented: “Everyone has suffered as a result of poor decision making by a small number of people in the banking sector which was then exposed by inadequate risk management systems and regulatory safeguards. Everyone accepts that business as usual is not an option. Painful lessons have been learned, and in the future no bank should be too big, or too important, to fail.”

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