February 29, 2024

DealBook: British Bank Panel’s Report Less Drastic Than Feared

LONDON — British banks should hold more capital and better shield individual customers from losses in other parts of their business, a government-backed commission said Monday.

The proposals stopped short of any major new regulations, like requiring a full split of consumer deposit-taking, or retail banking, and investment banking, which some banks had feared.

Instead, the commission said retail units should be isolated for protection, or ring-fenced, to allow them to survive even if other parts of the banks needed to be wound down.

Shares in British banks were mixed in late trading in London on Monday, with Barclays and Royal Bank of Scotland rising and HSBC falling.

“The report has been extremely generous to the banks,” said Roger Nightingale, a strategic adviser to hedge funds and institutional investors in London.

The proposals, by the Independent Commission on Banking, go further than recent changes in the United States in trying to separate more clearly the traditional deposit-taking services from the riskier but more lucrative trading operations.

The commission also said larger banks, like Barclays, should hold at least 10 percent of equity related to 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 proposed ring fencing of the retail business means that banks with both retail and investment banking units, including Barclays and Royal Bank of Scotland, would have to finance the two businesses separately and must not move capital from one area to the other.

The proposed changes would increase a bank’s financing costs, the commission said, but not as much as a complete split of retail and investment banking. And any costs would be more than offset by the benefit of “materially reducing the probability and impact of financial crises,” the report said.

Simon Gleeson, a partner at the law firm Clifford Chance in London, said the proposed changes could prompt banks to take on more rather than less risk, or to raise prices for retail customers as the cost of doing business increases. ‘‘All of this would make the operating of retail banks more expensive,’’ he said.

The proposals are part of an interim report and are not definitive. But they were seen as Britain’s most important response to the banking crisis, which has left two of the country’s largest banks in government hands. Before the release of the report, Barclays and HSBC had threatened to move their headquarters abroad should new rules be too punishing, which they argued would leave them at a disadvantage to rivals elsewhere.

John Vickers, who heads the commission, rejected claims that the commission bowed to bank pressures. “These are absolutely far-reaching reforms,” Mr. Vickers said at a news briefing in London. “They could be absolutely transformative.”

The commission, which includes former banking executives, was set up by the government in June to suggest ways to improve stability and competition in Britain’s banking industry following the financial crisis. The Treasury is expected to receive a final report in September.

George Osborne, the chancellor of the Exchequer, welcomed the interim report as a “very, very good piece of work.”

Under the proposals, any retail banking operations would have to be run as a subsidiary of the larger banking group. The subsidiary would have to stick to its own capital ratios but any capital above that could be moved from the retail banking business to other activities in the wider group. The banking group would also be able to continue selling financial products across its units, for example offering investment banking advice to retail banking clients.

“It would help shield U.K. retail activities from risks arising elsewhere within the bank or wider system,” the report said. “It could curtail taxpayer exposure and thereby sharpen commercial disciplines on risk taking.”

The commission said its recommendations sought a middle ground between the radical step of separating retail and investment banking and just relying on higher capital requirements to increase the stability of banks.

In the event of the collapse of a bank, the commission suggests that claims of depositors should be ranked higher than those of unsecured creditors. “It’s amazing how so many senior debt holders came out whole” from the banking crisis, Mr. Vickers said.

The commission also recommended making it easier and less expensive for customers to switch between British retail banks as a way to increase competition.

Article source: http://dealbook.nytimes.com/2011/04/11/british-bank-panels-report-less-radical-than-feared/?partner=rss&emc=rss

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