Vickers outside the ring fence: part 1 September 12, 2011 at 9:52 am
For me, the interesting parts about the Vickers Commission report on the future of British banking are not the widely reported recommendations to ring fence retail from investment banking. Here are some quotes, lightly edited:
First… if capital requirements could be increased across the board internationally, then the best way forward would be to have much higher equity requirements, in order greatly to increase confdence that banks can easily absorb losses while remaining going concerns. The Commission is however conscious that unilateral imposition of a sharply divergent requirement by the UK could trigger undesirable regulatory arbitrage to the detriment of stability. Second, a leverage cap of thirty-three is too lax for systemically important banks, since it means that a loss of only 3% of such banks’ assets would wipe out their capital. Third, in contrast with the Basel process, the Commission’s focus is on banks with national systemic importance, as well as on ones with global importance. Fourth, the loss-absorbency of debt is unfnished business in the international debate.
In other words, Basel III notwithstanding, the Vickers Commission recommends higher capital requirements for the large UK banks. Specifically, a CET1 ratio of at least 10%:
Equity is the most straightforward and assuredly loss-absorbing form of capital, and there is a strong case for much higher equity requirements across the board internationally. For the UK, taking the international context and the tax regime as given, and having regard to transitional issues and the potential for arbitrage through foreign banks or shadow banks, the Commission recommends that large UK retail banks should have equity capital of at least 10% of risk-weighted assets. This exceeds the Basel III minimum, even for G-SIBs, and the backstop leverage cap should be tightened correspondingly.
Chapter 4 is the interesting part here; I will return to this tomorrow.