Reforms aim to solve UK dilemma

Chancellor George Osborne has claimed the Government’s bank reform plans solve the “British dilemma” of how to protect taxpayers in a banking crisis without discouraging banks from settling in the City.

The Bank Reform Bill white paper, published last week, sets out plans to implement the work of the Independent Commission on Banking, which was set up by the Chancellor in June 2010 to tackle the dilemma.

The paper pushes ahead with ICB proposals to force banks to ringfence their retail activities from riskier investment operations.

It says banks’ retail arms must hold 10 per cent equity to risk weighted assets, higher than the 7 per cent required in the global agreement in Basel III.

Systemically important banks will be required to hold an extra 2.5 per cent.

  • The paper waters down ICB recommendations to give banks a leverage ratio, equity to unweighted assets, of up to 4.06 per cent, depending on their size compared to UK GDP. The Government plans to stick with Basel’s proposal of 3 per cent.

The Government’s proposals state retail customers should get their money back ahead of unsecured creditors and those who lend money to banks in the event of a bank failure.
In his Mansion House speech last week, Osborne said: “I believe we have found a workable way to solve what I called the ’British dilemma’, protecting British taxpayers in a way that does not make the UK uncompetitive as a home of global banks.”

The British Bankers’ Association has welcomed the Treasury’s position on leverage ratios. Chief executive Angela Knight says: “We have to match up what happens in the UK with what is happening elsewhere.”

European implementation of Basel is being finalised in the European Commission’s capital requirements directive IV. Osborne said he will wait for “international developments” before finally rejecting the ICB’s proposal for higher requirement for leverage ratios.

In the House of Commons ’ debate on the proposals last week, Labour Shadow Chancellor Ed Balls called for Osborne to commission the ICB to carry out an implementation report in the autumn. He said: “Why will he not agree to the opposition’s request to ask the Vickers commission to come back this autumn and publish an independent report on progress in implementing its reforms in the past 12 months?”

The Bank Reform Bill white paper – main points

  • Banks must ringfence retail activities from riskier investment operations and must hold 10 per cent equity to risk-weighted assets, higher than the 7 per cent required in the global agreement in Basel III. Systemically important banks will have to hold an extra 2.5 per cent.
  • Retail and investment operations must be legally separate entities and retail operations must not do business outside the European Economic Area.
  • Ringfenced banks and large building societies will service retail and small business customers and will be able to offer “simple derivatives” and hedging products like interest rate swaps.
  • Ringfenced banks and global systemically important banks based in the UK must have a primary loss absorbing capacity of 17 per cent, excluding over-seas operations. This can be made up of equity or debt.
  • Depositor preference will mean retail customers get their money back ahead of unsecured creditors and those who lend money to banks in the event of a bank failure.
  • Unsecured creditors will face losses with the introduction of a ’bail-in’ power to stop taxpayers having to bail out failed banks.
  • The white paper waters down ICB recommendations to give banks a leverage ratio of up to 4.06 per cent depending on their size compared to UK GDP. The Government proposes to stick with 3 per cent as set out in Basel.
  • Financial institutions with deposits of less than £25bn will be exempt from the proposals.