The aggregate sum outlined by the PRA will not necessarily mean that the banks are required to raise capital externally, sources indicated.
Advertisement
The PRA is also consulting on rules to ensure a broader range of banks, building societies and PRA-authorised investment firms structure their operations in a way that allows critical shared services to continue even in times of stress or failure.
The PRA raised the prospect of higher costs of banking services, saying that firms “may look to pass on the higher costs associated with ring-fencing to customers”. Still to be decided are rules that could add another 3pc to those buffers to account for the ring-fenced bank’s importance.
“Their ability to pass on higher costs will depend on factors that affect the intensity of competition in the relevant markets, such as the ease of switching for customers and barriers to entry and expansion”.
“If the splitting of retail and investment banks will occur then LLOY (which does not have a large IB franchise), RBS (which has been in the midst of a radical downsize and asset sale of IB operations) will be less impacted by these potential changes”, he wrote in a note to clients.
British high-street banking operations will be “ring-fenced” from the rest of the bank and will effectively have to treat their parent company as a separate company. The PRA estimates one-off costs of about 5 percent of total operating expenses to meet the new requirements, plus ongoing annual costs of about 3 percent.
The banks, though, have yet to be told precisely how much extra capital they will need to hold as a result of the implementation of the Vickers proposals, because the figure contained in the latest documents only relates to the treatment of one small part of their businesses.
The inquiry, ordered by George Osborne, the Chancellor, after the 2010 general election, was created to reduce the risk of another banking crisis.
After more than £65bn of taxpayers’ money had to be pumped into Lloyds and Royal Bank of Scotland in 2009, the new rules are created to avoid the need for any future bailouts of the six largest banks.
Sir John has continued to maintain that ring-fencing is necessary, insisting that it is a “done deal”, despite intense lobbying from bankers who argue that other domestic and worldwide reforms mean that the industry is now sufficiently safe not to require it.
The Bank of England’s Prudential Regulatory Authority (PRA) said the banks will be able to share crucial back office functions, such as IT and legal services, between ring-fenced operations.
The Government has gone further with measures to “electrify” the ring-fence separating retail and investment banking operations, meaning that regulators will have powers to order the full break-up of individual institutions if they do not comply with the new rules.
Advertisement
The ringfencing proposals came just hours after a spat between regulators and the Treasury which last night overturned plans that would have made senior bankers “guilty until proven innocent”.
