Vickers outside the ring fence: part 3 September 15, 2011 at 6:23 am

So far we have seen that the Vickers Commission proposals are reasonably penal in terms of both the levels of capital they suggest for the largest UK banks and the concomitant leverage ratio.

How much do these capital measures help? We can get some insight from Chapter 7 of the report. First some scene setting:

small banks might be disproportionately affected by prudential regulation… There are three potential ways in which small banks or new entrants might face higher capital requirements than large incumbents: they might be penalised for less experienced management or lack of a track record (especially new entrants); they might be required to hold extra capital to compensate for concentration in a particular market or geographical region (especially small banks); or the risk weights on their assets might be higher due to using a standardised rather than advanced approach to risk-weighting.

So, to look at this, the report studies the actual risk weights, and hence the actual amounts of capital, that various UK bank are subject to. The big determinant here is first whether the bank has an IRB model and second (because IRB models are particularly generous to retail mortgage assets), how many mortgages you have. The following table illustrates this generosity:

Vickers IRB

So Lloyds and Barclays have a capital charge for residential mortgages that is less than half of the standardised charge, whereas for Nationwide it is an astonishing seven times cheaper. As the Commission notes

The result may be that small banks are less systemic and easier to resolve than large banks, and yet are required to hold proportionally more capital.

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