In a white paper on the Bank Reform Bill published today, the Government confirms it intends to push ahead with requiring banks to ringfence retail activities from riskier investment operations and to make them hold 10% equity to risk weighted assets, higher than the 7% required in the global agreement is Basel III. Systemically important banks will have to hold an extra 2.5%, in line with Basel.
The Basel accords also say banks should have a leverage ratio, core tier one capital held against unweighted assets, of 3%. The ICB said this measure should be set on a sliding scale which goes up to 4.06 per cent depending on the size of the bank as compared to UK GDP.
However, speaking in the House of Commons this afternoon, Treasury financial secretary Mark Hoban said the government intends to stick with the internationally agreed level.
He says: “The white paper supports the Basel proposal for a 3% leverage ratio for all banks, including UK ringfenced banks.”
Responding to Hoban, Shadow Chancellor Ed Balls said the move to water down some of the requirements was down to the Government’s failure to push up standards when they were being set at a global level.
The ICB report said the Basel standard could apply to UK banks outside their UK retail arms “so long as they have credible resolution plans including adequate loss absorbing capacity”, and that to ensure this is the case retail and other banking activities should hold a minimum of 17 to 20% loss absorbing capital against risk weighted assets.
Hoban says: “Large ringfenced banks should have a minimum of loss absorbing capacity made up of debt or equity made up of 17%t of risk weighted assets… for smaller UK banks as the ICB recommends the minimum requirement should be lower.”
He added that the Government will push ahead with proposals to enable bank liabilities to be used in a “bail in” so banks do not require tax payer funded bail outs as easily.
The white paper says the Government wants to introduce the ICB’s recommendation of “depositor preference”, meaning retail customers get their money back ahead of unsecured creditors and those who lend money to banks in the event of a bank failure.
Banks with deposits of less than £25bn will be exempt from the reforms.