UK bank commission sticks to its guns
By Peter Thal Larsen and George Hay The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
Britain’s Independent Commission on Banking has stuck to its guns. Despite concerted industry lobbying and growing political nervousness about the consequences of reform, its recommendations on how to fix Britain’s banking system are resolutely tough. The ICB’s only real concession is to delay to 2019 implementation of its proposals for ring-fencing crucial operations. Sorting out the details of the new rules could leave banks in limbo for years.
Largely as expected, the ICB’s final report recommends putting vital banking operations inside a ring-fence. Its definition of what is vital is wide: the subsidiary must contain consumer and small business banking but the Commission’s rules will also allow banks to include deposits from — and loans to — large corporations. The fence will also be high: the subsidiary must have its own board of directors, and will face strict controls on how it interacts with the non ring-fenced bits.
The ICB has been unflinching on capital. It thinks big UK lenders should hold equity equivalent to 10 percent of risk-weighted assets. That’s 3 percent more than the Basel III standard adopted by international regulators. The commission also wants banks to hold total equity — including bonds that can absorb losses in a crisis — of up to 20 percent.
These reforms will impose sizeable costs. The ICB puts the hit to the industry’s pre-tax profit at between 4 billion and 7 billion pounds. Most of this arises because businesses that are not ring-fenced will face higher funding costs. However, these costs also partly reflect the removal of the “too big to fail” subsidy currently provided by taxpayers. That was the ICB’s explicit objective. Barclays and Royal Bank of Scotland, which have big investment banking arms, are likely to bear most of the burden.
Lloyds Banking Group, which has avoided the grim scenario of having to dispose of more of its huge UK market share to boost competition, has fared better. It could, however, still face a competition commission enquiry by 2015.
The ICB’s main concession to its critics has been to push back the timetable for reform to 2019, similar to the deadline for Basel III capital rules. As with Basel, investors are likely to want it over and done with, and demand speedier implementation. Even so, there is plenty of scope for banks to argue with legislators and regulators. The ICB’s own estimate of assets that will be inside the ring-fence ranges from 1.1 trillion to 2.3 trillion pounds. Investors hoping for clarity on UK bank reform have longer to wait.