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Bank of England insists banks are safer and stronger

Central bank rejects criticism from Sir John Vickers, former independent banking commissioner, that it has watered down his reforms.

Bank of England insists banks are safer and stronger

The Bank of England has rejected criticism from Sir John Vickers, former independent banking commissioner, that it has watered down a key part of his reforms aimed at making banks safer.

Writing in the Financial Times yesterday, Vickers, former chairman of the Independent Commission on Banking set up in response to the 2008 banking crisis, claimed the Bank of England wanted banks to hold less capital than the ICB had wanted.

‘The BoE is proposing substantially milder equity requirements for British banks than did the ICB. The wisdom of this policy is questionable,’ wrote Vickers (pictured).

Vickers’ main recommendation was for banks to ‘ring-fence’ or separate their retail operations from their risky investment banking activities by 2019. This was to avoid a repeat of governments and taxpayers having to bail out high street banks in a future crisis, like they did with Royal Bank of Scotland (RBS) and Lloyds Banking Group (LLOY).

His intervention came at a sensitive time after big slides in bank share prices around the world this year have revived memories of the financial crisis and prompted debates on whether enough has been done to tighten regulations and strengthen banks since then.

In a statement the Bank said it had gone beyond the ICB proposal for the minimum capital banks had to hold, with the addition of hybrid bonds that convert into equity, or shares, when a bank is at risk of collapse.

‘The Bank of England continues to support the conclusions of the ICB but is proposing a higher level of capital and overall resilience in the banking system than was proposed by the ICB in their final report,’ it said.

‘On a comparable basis, globally systemic banks in the UK will be required to have 10 times more capital than before the crisis,’ it added.

Sir John is concerned that plans for banks to have a ‘systemic risk buffer’ do not go far enough. He had wanted the six biggest lenders to have 3% of capital in reserve to back their ring-fenced retail arms.

Last month the Bank confirmed it wanted banks and building societies with more than £175 billion of risk-weighted assets to hold extra capital. Only lenders with assets over £775 billion would have to set aside 3%, however, and currently no bank falls into that category, according to the FT.

The Bank of England argues that in terms of total loss-absorbing capacity its proposals will require the biggest UK lenders to have capital equivalent to 22-23% of risk-weighted assets. That compared with the ICB’s recommendation of 17-20%, it said.

2 comments so far. Why not have your say?

Redundant (Old Timer?)

Feb 16, 2016 at 11:14

Ah it is good to see that with the passage of time the old Bankers Club can be restored! Bankers Levy coming down. A high threshold before the need to hold extra capital and no doubt that draft idea of ring-fencing the retail arm will quietly wither away. Pay and Bonuses up. All is well in banking until the next crises!

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Feb 16, 2016 at 22:32

Preference seems to be to stuffing the bondholders as soon as capital reserves come under pressure. Essentially this is a good idea dreamed up by bankers to protect bankers, and their shareholders. It is described pleasantly as giving bondholders a haircut. The intrinsic seniority of bondholders of any class to the shareholders may be set aside as a part of this process.

It lacks any clear legal sanction, disregards terms of contract, and compromises the position of trustees. Inconvenient Trust deeds are simply ignored, or are subject to fraudulent manoeuvres designed to oppress, intimidate and coerce bondholders to accept terms far less than their contractual dues.

Trustees are generally silent in the very circumstances in which the bondholders should expect their intervention. While the Trust deed is conferred for the benefit of the bondholders, the Trustee is both appointed by and compensated by the borrower. While the Trustee owes a duty to the bondholders, he is beholden to the borrower, a fact that explains the passivity of the Trustees.

Recent legal cases have generally ignored the duties of the Trustee altogether, and actions have been between major bondholders and the borrowers directly. Bypassing the Trustee in this way can result in a situation in which individual major bondholders can secure terms by private treaty with the borrower that are not available, or even known to, other bondholders of the same class.

One of the primary purposes of the FCA under the Financial Services and Markets Act is the prevention of financial crime. Unfortunately this is a role that it largely ignores. Rather than seeing that its primary role is securing compliance with the existing framework of criminal law, it has turned into a feeding machine for Civil Servants engaged in the proliferation of an impenetrable forest of largely counter-productive micro-regulations. It disregards the implications of the Fraud Act 2006 section 4 entirely when it comes to the behaviour of Trustees, and Directors, who are free to to indulge in openly fraudulent behaviour without fear or detection or attention from the FCA.!

I could go on. The story is one of a financial cesspit in which the financial interests and contractual rights of smaller investors are consumed without any hope of protection from the courts or from the regulators!

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