UK to push through bank reforms
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 a cost of up to 7 billion pounds ($11 billion).
Chancellor (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
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. It may not restore confidence for shareholders but it will restore confidence for bondholders.
In its final report, the Independent Commission on Banking (ICB) insisted banks hold core capital of at least 10 percent in their domestic retail operations.
It also set a higher benchmark than other European reforms with a requirement banks hold primary loss-absorbing capital of between 17 and 20 percent -- 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 percent in quality capital, or a likely 9.5 percent for the biggest.
The ICB estimated the annual pretax cost of its proposals for Britain's banks at between 4 billion pounds and 7 billion and recommended that 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 finance minister 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.
Britain's banks form a powerful lobbying group since financial services are estimated to contribute some 10 percent to the UK economy.
Britain's Big Four banks -- Barclays
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.
REAL CONCERNS
The proposals will limit 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.
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.
Shares in Barclays, Lloyds and RBS lost 4.8 percent, while HSBC shed 1.6 percent, echoing losses across Europe. The broader European banks index <.SX7P> was down 3.8 percent.
As foreshadowed, the ICB wants banks to put a ring-fence around their core retail banking operations. Consumer deposits and small business lending must be inside the cordon, but banks will have some flexibility on what else should be included.
Between 1 trillion pounds and 2 trillion worth of assets is likely to be held inside the ring-fence.
British banks have total assets of 6 trillion pounds, four times the size of UK GDP. Two of them -- Royal Bank of Scotland and Lloyds -- had to be partly nationalized following the financial crisis and a third, Northern Rock, was fully nationalized.
As a result the government, which now has stakes of 83 percent and 41 percent 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 analyzed 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.
Others suggested that the proposals failed to take into account any problems in the retail operations themselves.
What we need to bear in mind is that the problems that occurred two, three years ago -- Northern Rock, Alliance and Leicester, Bradford and Bingley -- weren't the result of investment banks, they were actually the result of problems in the retail banks themselves, said Antony Thomson, chairman of Metro bank.
I'm not sure that retail bank ring-fencing is going to be the cure that everybody thinks it might be.
($1 = 0.629 pound)
(Additional reporting by Steve Slater and Sarah White; Writing by Sophie Walker; Editing by Dan Lalor and David Holmes)
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