Vickers banking reform gets government green light

19th December 2011

The BBC's business editor Robert Peston gave a detailed analysis of the proposals this weekend.

In essence depositors' money will take preference over creditors' money if a bank gets into trouble, the UK banks' European retail operations will be ringfenced from any investment banking operations and banks will have to hold more capital.

Here Peston puts the capital requirement into layman's terms.  "Vickers proposed that the biggest UK global banks should have the ability to absorb losses equivalent to between 17 per cent and 20 per cent of worldwide risk-weighted assets.

"Broadly this means big banks should have enough capital plus loans that can be "bailed in" and turned into equity capital to cope with losses equivalent to around a fifth of the size of their respective balance sheets."

However Peston suggests that HSBC has won a major concession over the capital issue.

"My sense is that the Treasury has in some way softened what Vickers proposed – perhaps by making the 17% to 20% rule apply only to a big international banks' UK balance sheet, not its full balance sheet.

"Whether this represents a major victory by big banks over ministers who are worried that an HSBC could otherwise relocate its head office abroad to escape the reforms, we'll see," he adds.

Here MarketWatch looks at the impact on bank shares with Lloyds, RBS and Barclays down though HSBC rose a little possibly because of that concession.

The banks are worried that the devil is in the detail.

The Huffington Post quotes the British Banking Association's director general Angela Knight saying:  "Now we know where the government is setting the consultation, we need to work closely with the government and others to effect the right sort of outcomes for our customers. If ring-fencing and capital are set in wrong places, customers will have to pay more or go to non-UK banks, of which there are plenty. Getting the balance right is crucial."

And yet there remains some opposition in unexpected quarters.

On The Guardian's economics blog, Larry Elliott is worried that these capital requirements come at just the wrong time.

 "In the UK at least, questions are now being asked about the wisdom of ratcheting up capital requirements on the grounds that they threaten to become dangerously pro-cyclical. At this stage of the economic cycle, when demand is low and credit hard to obtain, banks should be reducing their capital ratios so they can lend more. Insisting that they hold more capital means they call in loans, sell assets and lend less. In monetary policy terms, it is the equivalent of seeking to balance the budget in a slump."

More from Mindful Money:

Is Vickers worth the cost?

RDR: Who is doing what to educate consumers?

'All economic models are inherently flawed': Q&A with The Reformed Broker

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