Britain’s government will force lenders to insulate their consumer units from their investment banks by 2019 as Chancellor of the Exchequer George Osborne tries to shield customers and taxpayers from another financial crisis.
A panel chaired by former Bank of England Chief Economist John Vickers recommended that banks build fire breaks between their consumer and investment banks in a 360-page report by the Independent Commission on Banking today. The plans will cost as much 7 billion pounds ($11 billion), the report said. Osborne, 40, said the government will legislate by the end of the current parliamentary session in 2015.
“John Vickers has set out a timetable,” Osborne told reporters today. “I intend to stick to his timetable.”
The government last year asked Vickers, 53, to chair a commission considering ways to enhance competition and reduce the risks posed by the financial industry. U.K. banks including Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Barclays Plc lobbied the commission and the government to delay implementation if it went ahead with the fire break plan, arguing it could harm the U.K.’s faltering economic recovery.
Giving banks more than seven years to comply with the new rules, “puts to rest any fears about how these reforms might interfere with the process of economic recovery,” Vickers told BBC Radio 4’s “Today Programme”. “We do have a fragile economic recovery at the moment.”
850 Billion-Pound Rescue
Once the recommendations are implemented, the so-called ring-fenced units will include all checking accounts, mortgages, credit cards and lending to small- and medium-sized companies, the report said. As much as a third of U.K. bank assets, or about 2.3 trillion pounds, will be included, the document said. Trading and investment banking activities will be excluded from the ring-fence.
“The commission believes that ring-fencing would achieve the principal stability benefits of full separation but at lower cost to the economy,” the commission said in the report.
Since 2007, the British state has been forced to spend, pledge and loan 850 billion pounds to rescue British banks, according to the National Audit Office.
Osborne described the report as “impressive” and “an important step towards a new banking system that supports lending to businesses and families, supports the economy and jobs, but doesn’t cost the taxpayer billions of pounds when it goes wrong,” according to an e-mailed statement today.
'Unwelcome and Unhelpful’
The report “is unwelcome and unhelpful, but it could easily have been a whole lot worse,” according to Ian Gordon, an analyst at Evolution Securities in London said in a note to clients today. “The additional breathing space will certainly avoid any lingering fears of a requirement for fresh equity issuance, and most importantly, allows banks some planning time to mitigate the likely adverse impact of segmentation on funding costs.”
Large banks should hold between 17 percent and 20 percent of “loss absorbing capacity” the report said, including equity. The remainder could be held as bail-in bonds, it said.
“Barclays will be the bank that is hit the most by this,” followed by RBS, said Shailesh Raikundlia, a banking analyst at MF Global Ltd. in London. Both London-based Barclays and Edinburgh-based RBS operate investment banks.
Barclays led declines in U.K. bank stocks, falling 2.2 percent to 140.9 pence at 10:35 a.m. in London trading, while RBS fell 1.1 percent to 21.26 pence, while Lloyds gained 0.3 percent to 31.14 pence. The three banks have dropped by more than 50 percent since the ICB’s first report in April. The Bloomberg Europe Banks and Financial Services Index fell 4.2 percent as Germany prepared plans to aid banks if Greece defaults.
While the commission stuck to its argument that Lloyds be forced to sell additional branches beyond the 632 required by European Union regulators, it said the government and the bank should negotiate the details.
A “strong challenger” bank should result, with at least 6 percent of the consumer checking account market. That’s 1.4 percentage points more than Lloyds agreed to sell in 2009 after receiving state aid.
There is “a real danger” that Lloyds’s current asset program “will fall back into the range of small banks that have not exerted a strong competitive constraint in the past,” the report said.
Ring-fenced banks should have an independent board, the report said. Unless the protected part of the bank is the majority of the lender, most directors in the insulated bank should be independent non-executives. The protected lender will make its own disclosures to regulators, it said.
HSBC, Barclays, Lloyds, RBS, Santander U.K. Plc and the Nationwide Building Society should hold more than 3 percent extra capital, on top of the 7 percent recommended by under Basel III, the report said. Co-operative Bank, Clydesdale Bank and the lender that Lloyds is selling should hold 1 percent to 3 percent extra.
“Smaller ring-fenced banks should have correspondingly smaller ring-fenced buffers,” the report said.
Creating a firewall “is at best a weak gesture and at worst a pointless act which will not in any material way impact the behavior or culture at the top of the banks where this crisis was born,” said David Fleming, national officer of the Unite trade union, which represents bank workers. “Greedy bankers” will find ways to maneuver around, and lobby against these reforms,” he said.
“The Vickers Report fails to deal with what really needs to be done to transform our banks,” Trades Union Congress General Secretary Brendan Barber told the labor movement’s annual meeting in London today. “Let’s argue for real reform of our financial system, turning the banks from casinos that enrich themselves into utilities that serve us.”