The U.K.’s largest banks may face higher capital requirements under Bank of England rules on the separation of retail operations from riskier investment banking.
Advertisement
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.
Separate proposals to ensure banks can keep running if hit by a crisis were likely to cost banks a one-off amount of five per cent of their operating costs, and have ongoing annual costs of three per cent, the BOE said.
The banks 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.
That could yet rise as units which are ring-fenced will also have to hold an extra buffer, the level of which will be set by the BoE’s Financial Policy Committee by the end of May.
The proposals made within the PRA’s consultation paper require ring-fenced banks to have enough capital as standalone units, a decision driven by a desire to shelter them from risks in other parts of a banking group.
The PRA confirmed that banks will be able to share crucial back office functions, such as IT and legal services, between ring-fenced operations.
The TSC will next week take evidence from Chancellor George Osborne, Prudential Regulation Authority chief executive Andrew Bailey and Bank of England governor Mark Carney on the Bank of England bill, which will include the reforms.
The ring fencing, to be brought in by 2019 and which aims to protect consumers in the event of a crisis, will only affect banks with more than £25 billion in deposits.
It follows the mammoth banking bailouts in the 2008 financial crisis and will affect all major lenders with a balance sheet of more than £25bn – Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, Santander United Kingdom and the Co-operative Bank. “We have provided clarity for affected banks on how we will implement ringfencing and this will enable firms to take substantial steps forward in their preparations for structural reform”.
The aggregate sum outlined by the PRA will not necessarily mean that the banks are required to raise capital externally, sources indicated.
Those rules have led a few banks to consider applying for waivers, while Lloyds is expected to seek a waiver for the broader restructuring because of its limited investment banking activities.
Advertisement
Separately the plans to make senior bankers more responsible for failings which happen in their area were amended.
