The person responsible for the review of the future security of the banking sector in the UK, has said that the plans put into place by the Bank of England do not go far enough to ensure the safety of the UK banking sector.
Sir John Vickers, who lead the ICB (Independent Commission on Banking), stated:
“The Bank of England proposal is less strong than what the ICB recommended.” He went on to say that he didn ‘t “think the ICB overdid it”.
Specifically, Vickers pointed to suggestions that had been made regarding the action which should be taken to ensure that the banks have enough capital at their disposal. The vast majority of this capital comes from the banks ‘ shareholders, who put their money at risk in return for a share in the profits.
However this year has seen many banks ‘ lose share price value.
Sir John said:
” The Bank of England might want to reflect on the turmoil we’ve seen in banking shares. That’s a very important lesson that you have to get the basics right,”
There has been an ongoing debate in the financial sector between the banks and the regulators over the amount of capital that it is reasonable to expect the banks to have. The main aim of the regulators is to make sure that the banks do not require another bailout of the scale that was seen during the last financial crisis.
Sir John believes that there is a need for a larger amount of capital because nobody knows just how large the next hit to the system will be.
He goes onto say that shares are the best form of capital because they represent a high quality, tried and tested method.
“A good way to think about it is as an insurance policy,” he said. “You do have to pay a premium to insure your house and you hope nothing bad will happen. But if it does, you are much better off in paying that premium, and for full coverage.”
“If banks run out of capital, all sorts of havoc could ensue. We want to be in a position where there’s enough of a buffer to take any losses that might occur.”
“Other types of capital – CoCos, for example – and new forms of loss-absorbent bank debt are welcome but untested. Equity capital is the best shock absorber – even if you haven’t got a clue what’s going to hit you, it works.”
He went on to say:
“The financial crash of 2008 exposed the Big Shortage – of bank capital. Some banks that had lent out, say, 40 times their shareholders’ capital couldn’t absorb their losses when loans went bad. Hence the taxpayer bailouts and further economic damage from bank lending seizing up.
The clear lesson is that banks, especially major banks providing core retail services, need much bigger safety buffers – more capital relative to loan exposures. Important progress has been made internationally and in the UK on this front, but a key policy question remains open: how big a safety buffer should major British banks have?
On 29 January, the Bank of England set out for consultation its proposed answer. The BoE expects that it would increase capital requirements, relative to banks’ exposures, by about 5%. Well worth having, but not ambitious. So on bank safety buffers, the BoE’s answer to the question “Are we nearly there yet?” is “Yes”.”