August 7, 2022

DealBook: Britain Backs Higher Capital Rules for Banks

LONDON – Britain’s government is supporting a proposal that would require banks to hold more capital and partly shield retail operations from investment banking.

George Osborne, the chancellor of the Exchequer, is expected to endorse the plan when he addresses several hundred bankers and other financial professionals at a speech in London on Wednesday evening, a government official said. The proposal, which would most likely increase operating costs for banks, was initially made in an interim report by the government-backed Independent Commission on Banking in April.

Mr. Osborne’s backing makes it more likely that the rules, which include a so-called ring-fencing of consumers’ deposits from potential losses at investment banking operations, will be made law. If the country adopts the regulation, it would put Britain ahead of the United States in pushing through changes to separate more clearly the traditional deposit-taking services from the riskier but more lucrative trading operations.

But questions remain about which parts of a bank’s operations should be included in the ring fence, a rule intended to limit the need for future bank bailouts by taxpayers. For example, it is unclear whether wealth management or derivatives to hedge currency movements would be inside or outside the shielded operation. The banking commission is expected to present its final report to the government on Sept. 12.

Since the interim report in April, British banks have lobbied to limit the parts of the bank that would be shielded from the rest of the business and would have to be financed separately. Stephen Hester, chief executive of Royal Bank of Scotland, which is majority-owned by the government, told a parliamentary committee last week that the proposed rules would actually have the opposite of the desired effect and increase risk in the banking system.

British “banks are focused on ensuring financial stability and supporting economic recovery,” the British Bankers’ Association said in a statement on Wednesday. “A significant part of this work is ensuring the right safeguards are in place for customers’ deposits.”

Shares in Britain’s biggest banks, including HSBC, Barclays and Royal Bank of Scotland, fell on Wednesday in London.

Mr. Osborne is also expected to support the commission’s proposal to require larger banks, like Barclays, to hold at least 10 percent of equity relative to their risk-weighted assets, more than the 7 percent detailed in the so-called Basel III agreement to overhaul international bank regulation.

But the commission also said that because investment banks operate globally, British banks should not be subject to different capital rules than those agreed to internationally.

The commission was created to find ways to strengthen the British banking system and avoid large losses for taxpayers in any future financial crises. It also had a mandate to improve competition in the British retail banking sector, which became more concentrated over the last three years.

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