UK bank commission makes recommendations for banks; cap requirements tougher than Basel III.
The Independent Commission on Banking (ICB) Monday released its interim recommendations to improve stability and increase competition for UK banks, but many see it as not fostering competition but in fact stifling it. Notably, some say the ICB’s call for banks to hold equity of 10 percent (vs. the 7 percent proposed by the Basel Committee) will shut new banks out. That level will also make credit more expensive.
The purpose of the long-awaited report was to make banks “better able to absorb losses,” make it “easier and less costly to sort out banks that still get into trouble” and finally to curb “incentives for excessive risk-taking.” But to some the reforms go too far, particularly the issue of capital levels.
“Capital levels have increased markedly since the financial crisis and will continue to do so as the Basel III reforms are implemented,” wrote PwC’s Steve Davies, head of UK retail banking, of the ICB’s plan to require banks to hold 10 percent of equity, together with “genuinely loss-absorbent debt.” Therefore, “additional capital requirements could push up mortgage, loan and other credit costs while making it harder for new banks to enter the market.”
Making it more difficult for new entrants is certainly at cross purposes with the ICB’s calls to increase competition. It suggests that making banks smaller by “ring-fencing” certain functions of the bank will increase competition as well as protect taxpayers. Currently, the Commission feels that large banks still enjoy “some degree of implicit government guarantee,” which gives them a competitive advantage.
In making its proposals, the report mentions Lloyds bank, which it feels should divest more than it is already planning to do under a European Commission provision. Lloyds in a statement fired back, saying expanding its divestiture plans, what it calls Project Verde, would not benefit its customers. Nor would it increase competition. “This option appears to be based on limited evidence and may paradoxically potentially delay a new competitor coming into the UK market,” said the bank’s CEO, António Horta-Osório.
It’s doubtful that Lloyds will take a hard line like fellow UK bank Barclays did and talk about leaving the country, but it could. Last year, Barclays weighed whether to leave the UK instead of following calls for breaking up big banks and then talked about it again in the wake of an announced UK bank levy in February. There were also rumblings about leaving the UK from HSBC and Standard Chartered.
ICB will now move on to debating which reform options “appear to have most merit” and welcomes responses in that regard, which it will likely gets lots of. It will issue its final report in September.