The Vickers report: nice ideas, needs some work — but is there enough legal basis to get the reforms passed? It’s worth asking.
Higher “loss-absorbing” capital is the capstone of the Independent Commission on Banking’s overhaul of UK lenders. More important, arguably, than the ring-fencing concept overall. (Ring-fenced retail banks will be founded upon a 10 per cent capital ratio. The proposal for banks to hold loss-absorbing instruments against 17 to 20 per cent of risk-weighted assets is even bigger. Entire asset classes — CoCos, “bail-in bonds” — could have their fates decided here.)
But will European lawmakers be happy with all of that?
From page 149 of the ICB report:
The Commission is satisfied that its structural reform proposals are compatible with current European Union law, although a number of issues including the ability of the UK authorities to apply capital and liquidity standards to ring-fenced banks will need to be clarified in relation to the ongoing consultation on CRD IV (see Box 5.1). The draft proposal on CRD IV from the European Commission envisages that it will be maximum harmonised, but allowing some flexibility for member states in certain areas. For the reasons set out in Box 4.6 in Chapter 4, the final CRD IV text should be clear that member states may apply higher minimum standards to their banks if they wish.
It should be clear. Will it be clear?
“Maximum harmonisation” has already been an issue for Europe and Basel III in general.
CRD IV is Capital Requirements Directive IV, the law that will be Europe’s ticket into the broader Basel III framework. Confusingly CRD is actually more like a regulation than a directive now, which matters because regulations can be maximum-harmonised. That’s potentially a problem for the UK adding a ‘British Finish’ to capital rules, or at least the question is mostly unanswered in the Vickers report. It does mention that the UK reforms could be executed via “Pillar 2″ in CRD IV, which is jargon for Europe allowing regulators national powers to impose extra specific capital on particular banks. Even more technically, “Pillar 2″ depends on particular banks’ risk profiles.
So while it is possible that the Vickers Rule(s) could end up within Pillar 2… we wonder how that squares with the nature of the loss-absorbing capital above. The 17 per cent figure is a minimum standard, with a further 3 per cent “resolution buffer” for specific risks from particular bank business models.
There are other jurisdictional quirks within the Vickers report as well — for instance the retail ring-fence will now apply to lenders’ operations in the European Economic Area, not just the UK, due to European treaty law.
It’s not clear how much leeway lawmakers will offer — but clearly, it’s not irrelevant either.
Related links:
Full Vickers coverage – FT Business Blog
Sweeping change proposed for UK banks – FT