London: Britain’s banks face some of the world’s toughest regulations under reforms outlined on Monday, which require them to insulate their retail lending activities and store up billions in extra capital at an annual cost of up to £7 billion ($11 billion).
Finance minister George Osborne said he would fast-track legislation based on the proposals, aimed at avoiding a repeat of the financial crisis which led to two of Britain’s biggest lenders, Lloyds and Royal Bank of Scotland , being bailed out with massive injections of government cash.
“We’re getting right up there with the Swiss in terms of having the most onerous capital regime,” said Jane Coffey, a fund manager at Royal London Asset Management.
In report, the Independent Commission on Banking (ICB) insisted banks hold core capital of at least 10% of risk-weighted assets in their domestic retail operations. They will have to hold a further 7 to 10% of capital that can be in the form of “bail-in” bonds, giving a requirement they hold a total of primary loss-absorbing capital of between 17 and 20% -- a level which only the Swiss also plan to introduce.
By comparison, new global regulation due to come into force in 2019 asks banks to hold a minimum of 7% in quality capital, or a likely 9.5% for the biggest institutions.
The ICB estimated the annual pretax cost of its proposals for Britain’s banks at between £4 billion and £7 billion and recommended the reforms be completed by 2019, to take into account the current economic environment.
The British government backed the report, saying it would help boost the economy and protect taxpayers.
“John Vickers (ICB head) himself sets out a timetable and I intend to stick to his timetable. So he says let’s have all the changes in place by the end of this decade,” said Osborne.
“There are a lot of changes involved, that is why it will take some time, but let’s get the legislation through in this parliament,” he added.
A senior figure in the Liberal Democrats, junior partners in government, also backed the report, suggesting legislation may not be held up by disagreement within the Conservative-led coalition as had been possible. Business minister Vince Cable “welcomes the recommendations and thinks it’s an excellent report,” his spokeswoman said.
Britain’s “Big Four” banks -- Barclays and HSBC as well as Lloyds and RBS -- have fought against tough new regulation on top of EU and global reforms. They form a powerful lobby since financial services contribute some 10% to the UK economy.
“The banking industry ... is a much more important component to the UK than it is to other countries, which is why the gold-plating of the regulatory regime which is being implemented globally has to be sensible and not push us into a corner where the banking industry here is uncompetitive,” said David Miller, fund manager at Cheviot Asset Management.
Barclays and RBS are expected to be hardest hit by the reforms because they have the biggest investment banking units.
The report was better news for Lloyds as it backed away from an earlier recommendation that it be forced to sell more branches than the 632 it has already been ordered to offload by regulators to scale down its domestic presence following its absorption of Halifax parent HBOS during the crisis.
By 0930 GMT British bank shares had bounced from an initial slump to outperform their European peers, which were pummelled by worries about their exposure to euro zone debt.
Shares in Barclays were down 1.6%, Lloyds was up 0.7%, RBS off 0.3% and HSBC down 2%. The broader European bank sector was down 4.1%.
The proposals will impose a ring-fence limiting the extent to which a bank can use money in its retail arm to fund investment banking activities, thus increasing its funding costs, which will likely hit its profits and possibly make it harder to lend to businesses.
Consumer deposits and small business lending must be inside the cordon, but banks will have some flexibility on what else should be included.
“There are real concerns that ring-fencing may limit banks’ ability to lend to small businesses,” said John Longworth, director general of the British Chambers of Commerce.
Between £1 trillion and £2 trillion worth of assets is likely to be held inside the ring-fence.
British banks have total assets of £6 trillion , four times the size of UK GDP. Two of them -- Royal Bank of Scotland and Lloyds -- had to be partly nationalised following the financial crisis and a third, Northern Rock, was fully nationalised.
As a result the government, which now has stakes of 83% and 41 % in RBS and Lloyds respectively, set up the ICB last year to look at ways of ensuring taxpayers do not have to bail out any more banks should future crises occur.
“Any further reform measures adopted by the UK authorities need to be carefully analysed and compared with those agreed internationally, ” the British Bankers’ Association said.
“It is vital that the full impact any further reforms will have on the economy, the recovery and banks’ ability to support their customers in the UK is understood.”