Good morning and welcome to our rolling coverage of the long-awaited report from Sir John Vickers on UK banking reform.
You can find the text of the official report at the Vickers site.
Megan Murphy (MM), the FT’s investment banking correspondent, will guide us through the report.
12:00, MM: Sir John Vickers is calling a wrap on the press conference now, on the dot of midday.
A very interesting 90 minutes, with a strong defence of the commission’s work and what it is trying to achieve not only from Sir John, but most notably from the FT’s Martin Wolf and Bill Winters, the former co-head of investment banking at JPMorgan.
The banking industry may be taken aback by the tone of some of their commentary, as well as their conviction that ring-fencing is the best solution for removing the implicit taxpayer subsidy of universal groups, regardless of the direction taken by regulators/governments in other countries. That concludes the live blog for now, but we’ll be keeping an eye on developments and will post again later on anything new.
11:59, MM: Vickers is addressing a frequent criticism of ring-fencing retail operations — that it doesn’t address or prevent the kind of wholesale funding squeeze that brought down Lehman Brothers. He says that monitoring funding is part of the overall package, and that the overall package will reduce systemic risk.
11:45: The FT Money team has just put up this Q&A on how the proposed reforms will affect consumers
11.34, MM: Martin Wolf, from the FT, notes that banks should be satisfied with lower returns, that are more stable…
11:20, MM: Bill Winters, former co-head of global investment banking at JPMorgan Chase and ICB member, acknowledges that reforms are expected to reduce banking groups’ overall profitability — so will have a follow-on impact on bankers’ pay.
That’s a controversial point among some industry figures, who grumble privately that reducing profits has been a guiding aim.
11:06, MM: Commission member Martin Wolf, also of the FT, calls the notion that the UK should refrain from bringing in ring-fencing because no other country is bringing in a similar structure “ruinous,” in a withering attack on tacit taxpayer subsidy of universal groups.
11:00, MM: Back to the press conference, and Sir John Vickers warns against a “pick and mix” approach to the ICB’s proposals. He emphasises again that it’s a package of reforms.
10:53: This analysis is just in from Jonathan Guthrie’s FT’s Lombard column:
Unlike Sir John Vickers, who this morning published important proposals for UK banking reform, Moses was not opposed by professional lobbyists determined to give the Israelites some wriggle room on the toughest of the Ten Commandments.
10:50, MM: More from Vickers:
The too big to fail problem must not be recast as a too delicate to reform problem.
He also says that the reforms are in part about bringing UK banking “back to where it used to be.” But still free to “flourish” in global markets. Hmm…
10:48, MM: Vickers adds that ring-fencing will strengthen, not weaken, the flow of credit to businesses and consumers, hitting back at the core bank argument against reforms.
10:43, MM: Vickers says that the ring fence will raise costs for banking groups, particular for activities outside the ring fence. But that returns risk bearing to where it should be — with bank investors, rather than the taxpayer.
10:35, MM: We are back live at the ICB press conference, where Sir John Vickers is speaking about the merits of ring-fencing, saying it:
1) “Insulates” UK banks from global financial shocks
2) Makes it easier to wind up activities or operations of universal groups
3) Curtails government guarantees, reducing risks to public finances
10:13, MM: A quick recap of where we are at, for any new readers.
The ICB’s final report on banking reform was published this morning (a bit earlier than expected due to a leak). The recommendations are pretty much as expected — a wide “ring-fence” between retail and investment banking, UK retail operations must hold 10 per cent of equity capital to their risk-weighted assets, a proposed “UK finish” to the Basel rules that would see banking groups hold loss-absorbing capital of between 17 and 20 per cent, and confirmation that Lloyds will not have to sell additional branches to the 632 already on the block as part of a forced divestiture.
Bank shares have recovered after being down as much as 5 per cent in early trading. Patrick Jenkins, the FT’s banking editor, and Sharlene Goff, our retail banking correspondent, will be at the ICB press conference shortly. We’ll blog anything significant.
09:45: From Evolution analyst Ian Gordon:
Today’s ICB report is unwelcome and unhelpful, but it could easily have been a whole lot worse. A (recommended) “delay” in implementation until 2019 should cause materially less transitional damage than might otherwise have been the case.
The market was priced to expect bad news, and although we continue to expect all three UK domestic banks to generate depressed returns on equity through 2012/13 and to still trade below tangible book value in 12 months time, we do expect at least a (relative) relief rally from here.
09:40: And now for the small business reaction, from the chairman of the Federation of Small Businesses John Walker:
The FSB welcomes the recommendations set out in the ICB’s report. If fully implemented not only will it make the sector safer for both businesses and current account holders, but it will also help to improve competition – something which the sector so badly needs.
Recommendations to give more power to the Financial Conduct Authority to promote effective competition; using the Lloyds divestiture to create a new bank and providing more transparency for customers that want to move banks should all be effective ways of opening up competition in the sector. We hope to see the recommendations enacted as soon as possible and call for full implementation before the end of this parliament.
09:30: Reaction now in from the CBI’s deputy director general Dr Neil Bentley:
The UK is going it alone on ring-fencing, so the government must rigorously examine how and when to implement these proposals, otherwise it risks damaging businesses and threatening growth.
The commission is right to recommend a flexible approach to ring-fencing and suggest a reasonable time frame for implementation. However some of the services that might be prohibited within the ring-fence, such as exchange rate hedging and other risk management products, could increase costs for firms to access critically important financial services.
The proposals on capital requirements are out of step with internationally agreed measures underway so will increase the cost of lending for UK businesses, putting them at a disadvantage to their overseas competitors.
Companies want greater competition in banking so it’s positive that the commission has set out measures on making switching much easier and improving price transparency.
The UK needs a stable and resilient banking system, but it is critical that the government implements these reforms in a way that supports lending to businesses and helps growth.
09:00: So after a busy morning, we’ll be moving to rolling coverage for the next hour, before returning to live for the press conference at 10:30. Catch up on the key points so far with our summary.
08:50: Chancellor George Osborne has told reporters:
John Vickers 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.
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 and we have a commitment to legislate to get the rules in place … and then it will take some time for the full rules to come in to place.
08:42: Tweet from Adam Stachura (director of campaigns at the Scottish libdems):
08:38, PJ: Patrick Jenkins, the FT’s banking editor, has weighed in with some crucial detail on what the report says about bank funding — the critical issue facing the sector at the moment.
There are two key points on funding. Here’s what the report says on p61.
A bank’s treasury function also raises wholesale funding – ie raising debt or taking deposits from sources other than individuals and small businesses. Over-reliance on short-term wholesale funding quickened the failures of a number of UK banks during the crisis, and arguably caused them. As a result regulation in this area has been tightened and would act as a significant constraint on a ring-fenced bank’s ability to fund from short-term wholesale sources.
Properly controlled wholesale funding could improve the diversity of a ring-fenced bank’s funding base and finance its growth.
On balance, a ring-fenced bank should be allowed to raise wholesale funding, but in addition to existing regulations backstop limits should be placed on the absolute level of wholesale funding permitted. A cap on the absolute level would act as a check against attempts to arbitrage more complex regulations. Again, similar provisions exist in the Building Societies Act although the level set there (50%) may not be appropriate for all ring-fenced banks.
The limit should be calibrated so that it is non-binding for a bank as of today but guards against de-stabilising wholesalefunded growth in the future.
In other words:
1. The ringfenced entity as well as the rump must comply with liquidity standards (FSA/Basel III) that currently apply only at group level.
2. There should be a wholesale funding limit applied, although the ICB stops should of saying where the limit should be set. This will be a key point of uncertainty for banks, and the ICB will be criticised for copping out of finalising the detail.There are two key points on funding.
08:30, MM: Sir John drew an explicit link between cost of proposed reforms — pegged by the ICB at between £4bn and £7bn — and the size of banks’ bonus pools on the Today programme. A savvy nod to the ongoing public furore over bankers’ pay that is likely to go down extremely well.
RECAP 08:20, MM: To recap where we are so far, for readers just joining us:
The Independent Commission on Banking, led by Sir John Vickers, has released its final recommendations for reforming the UK’s banking sector. While many of its proposed reforms have been widely trailed, here are some key points:
1) Banks should bring in a wide “ring-fence” separating their UK retail banking operations and investment banking activities.
2) UK retail banks should hold equity capital of at least 10 per cent of their risk-weighted assets.
3) Large UK banking groups should have primary loss-absorbing capacity of at least 17 – 20 per cent. That includes unsecured bank debt that regulators could require to bear losses (so-called bail-in bonds) and contingent capital or “cocos” that can also absorb losses.
4) Lloyds Banking Group will not be required to sell more than the 632 branches it is already being forced to divest.
08:16, MM: The ICB was clearly looking to head off criticism that its proposed reform package wouldn’t have prevented the type of failures we saw at Lehman, RBS, HBOS or Northern Rock – criticism we are likely to hear again and again from industry figures today.
08:13, MM: Bank shares falling in response to report — RBS down 5 per cent, Barclays 4 per cent.
08:12: And this from Graeme Hughes, group director of building society Nationwide:
The ICB is right to see the building society model as a framework for designing the ring-fence.
The ICB’s proposal to ring-fence customer deposits is a sensible one. As a building society, Nationwide has always operated a ring-fence model and this has stood us in good stead to weather the financial crisis.
08:10: Chuka Umunna, shadow minister for business and small enterprise, tweets:
08:05: Reaction is coming in thick and fast. This from David Fleming, Unite national officer:
The proposals set out today kick the overdue reform of the banking sector into the long-grass. The suggestion to create firewalls in 2019 will bring immediate uncertainty to workers across the sector, while the greedy bankers find ways to manoeuvre around, and lobby against these reforms.
Simply creating a firewall is a best a weak gesture and at worst a pointless act which will not in any material way impact the behaviour or culture at the top of the banks where this crisis was born.
08:00, MM: One of the most interesting sections of the report describes how the ICB’s reforms would have addressed bank failures during the financial crisis — here’s how the commission describes it:
Box 2.1: How would the reforms have addressed bank failures during the recent crisis?
HBOS
Why did it fail?
At end-2007, 56% of its funding was wholesale (more than half of which was short-term) and it had a very thin layer of equity capital: less than 6% of RWAs and only 2.7% of assets. Increasingly unable to replace maturing wholesale funding, it was acquired by Lloyds TSB in early 2009.
How might the reforms have helped?
Liquidity reforms would have made it more resilient to a liquidity crisis. The ring-fence would have complemented this with wholesale funding restrictions, as well as restricting the activities of its treasury function and requiring more equity. Macro-prudential tools could have constrained the property boom to which it became particularly exposed. Even if it had still run into trouble, more capital, bail-in powers, loss-absorbency of 17%-20% of RWAs and the ability to separate the ring-fenced bank from the rest of the group would have given the authorities many more options to resolve it, rather than injecting £20bn of taxpayer funds into Lloyds TSB/HBOS.
Lehman Brothers
Why did it fail?
It was heavily exposed to US sub-prime mortgages and over 30 times leveraged – a combination which led creditors to stop providing funds as large losses began to materialise. When in late 2008 it ran out of liquid assets to sell to meet this withdrawal of funds, it filed for bankruptcy.
How might the reforms have helped?
Reforms to improve regulatory co-operation, the regulation of shadow banks and liquidity would have reduced the risks it posed. Greater use of central counterparties for derivatives would have limited contagion. If required in the US, bail-in and minimum loss-absorbency of 17%-20% of RWAs would have restricted the impact of losses and the consequential liquidity run. In the UK, the ring-fence would have insulated vital banking services of universal banks from contagion through their global banking and markets operations. (Measures have also been put in place to reduce delays in returning client assets – a feature of the Lehman Brothers insolvency in the UK.)
Northern Rock
Why did it fail?
In June 2007, following balance sheet growth of >20% p.a., only 23% of its funding was from retail deposits, with the majority being wholesale funding (e.g. securitisations, covered bonds). As wholesale funding markets froze in autumn 2007, the Bank of England provided emergency liquidity assistance before it was taken into public ownership in 2008.
How might the reforms have helped?
Liquidity reforms and more intrusive supervision would have restricted significantly its ability to pursue a strategy of rapid growth financed through wholesale funding. The ring-fence would have complemented this with wholesale funding restrictions and by requiring greater equity capital.
Macro-prudential tools would also have leant against the rapid growth in credit provision that was central to its strategy. More capital, bail-in powers, loss-absorbency of 17%-20% of RWAs and the existence of the UK Special Resolution Regime would have given the authorities many more options to resolve it in the event that it still failed.
RBS
Why did it fail?
It bought most of ABN AMRO under a largely debt-financed deal which left it with limited equity at end-2007: 4% of RWAs (1.2% of assets). It suffered large losses from proprietary trading, structured credit, derivatives and write-downs of goodwill from recent acquisitions. It raised £12bn of new equity from existing shareholders in 2008 but this proved insufficient. The Government injected a further £45bn of equity and insured some assets against extreme losses.
How might the reforms have helped?
Capital reforms, most notably greater emphasis on equity, use of a leverage ratio, and a recalibration of risk weights, would have made it more robust – it would not have been able to buy ABN AMRO without raising substantial new equity and it would have had fewer incentives to take significant risk in trading and derivatives. The ring-fence would have isolated its EEA banking operations from its global markets activities where most of its losses arose. Together with more loss-absorbent debt, this would have given the authorities credible alternative options to injecting £45bn of taxpayer funds into the group – e.g. isolating the ring-fenced bank for sale or temporary public ownership and an orderly wind-down of the rest of the group at no public cost.
07:50: More from Mr Osborne on Sky News endorsing the plan:
(ICB head) John Vickers 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,
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 and we have a commitment to legislate to get the rules in place..and then it will take some time for the full rules to come in to place.
07:45: Patrick Jenkins, the FT’s banking editor, says HSBC in particular will be relieved by the ICB’s recommendations. Flexibility on ring-fencing means billions of deposits won’t be stranded within the firewall.
On the impact of its recommendations, interesting that the ICB says that the proportion of wholesale and investment banking activity in the City that would be directly affected by the proposed reforms would be “relatively small”.
The proposed capital standards for ring-fenced banks, which have been calibrated partly with an eye to regulatory arbitrage possibilities, should not threaten competitiveness in retail banking either.
Nonetheless, by restoring funding costs to levels that properly reflect risk, the proposed reforms may be contrary to the private interests of wholesale/investment banking operations of some UK banks. But the public interest is another matter. It is best advanced by removing the prospect of government support. The fact that some other countries may implicitly subsidise their wholesale/investment banks does not make it sensible for the UK to do so.
07:40: Lloyds Banking Group, which some will say has done as well as could be expected from today’s report, has the following to say:
The Independent Commission on Banking (ICB) has just released their final report which has been produced following consultation with the financial services industry.
We are currently assessing the full implications of the report and may provide a further update to the market once we have had the opportunity to review the report in detail.
07:35: Sharlene Goff, the FT’s retail banking correspondent, notes with interest that the ICB says regulators could force certain institutions to hold more equity capital – another 3 per cent for example – if they don’t think they can be easily wound down.
Also from Sharlene:
Unsurprisingly Vickers has not recommended a full blown competition inquiry into high-street banking but says this should be considered if its proposals are not introduced by 2015
Apart from the Lloyds sale, ICB wants a new switching service for consumers and SMEs up and running as quickly as possible. And for the new regulator to have greater powers to clamp down on competition.
07:30: And an official statement from George Osborne via Reuters:
The government welcomes final report of the Independent Commission on Banking. The chancellor considers it to be an impressive report and an important step towards a new banking system that supports lending to businesses and families, supports the economy and jobs, but doesn’t cost the taxpayer billions of pounds when it goes wrong.
07:20: Reaction is starting to come in, this from the British Bankers’ Association:
UK banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by UK, EU and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained.
The ICB’s recommendations cover the same important issues. Any further reform measures adopted by the UK authorities need to be carefully analysed and compared with those agreed internationally. 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.
And this from the BBC’s Robert Peston:
….. the reforms are at least as significant for the City of London as Big Bang was in 1986, when banks were allowed to buy stockbrokers. Arguably there has been nothing quite as significant for banks in more than a century.
07:16: As expected Lloyds will not have to sell more than the 632 branches it is already being forced to divest – but the commission wants the government to make sure the business it is selling creates a strong new competitor. Basically it wants the branches attached to another business.
07:10: ICB has recommended that ring-fencing and its other key recommendations should be completed at the latest by 2019, in line with the new global Basel III framework on capital.
That’s especially important in light of some stunning comments in this morning’s Financial Times from Jamie Dimon, chief executive of JPMorgan Chase. Mr Dimon suggested that the US should pull out of the Basel framework, calling some of the requirements “un-American.”
Given that banks will be forced to hold minimum core tier one capital of 7 per cent under Basel — and the biggest groups 9.5 per cent — those comments are likely to cause quite a stir in Europe.
07:00: The ICB’s report is being described as the most radical reform of the banking industry in a generation.
Sir John Vickers
The report leaked out this morning around six, an hour earlier than planned. Key recommendations include:
1) A wide ring-fence between UK retail banking operations and investment banking activities
2) UK retail banks should have equity capital of at least 10 per cent of their risk-weighted assets
3) Large UK banking groups should have primary loss-absorbing capacity of at least 17 – 20 per cent. That includes unsecured bank debt that regulators could require to bear losses (so-called bail-in bonds) and contingent capital or “cocos” that can also absorb losses.
4) Banks will be able to decide whether to include big corporate deposits and loans in the ringfence or not – which should keep them all happy. (HSBC wanted these to be included, RBS didn’t.)
