LONDON: One of Britain's most influential architects of banking reform resumed a spat with the Bank of England on Wednesday, arguing that policymakers have gone too easy on the size of mandatory buffers aimed at protecting balance sheets in times of stress.
The Independent Commission on Banking (ICB) chaired by John Vickers has recommended a systemic risk buffer for banks equivalent to 3 percent of risk-weighted assets, while the Bank of England says the level should be 1.3 percent.
"The Bank's analysis for the right levels of capital assumes average risk conditions, which is not the right assumption. It's like testing flood defences by assuming the weather is average," Vickers told reporters, responding to a 13-page letter to Parliament in April from BoE governor Mark Carney which said banks were, in general, adequately capitalised.
Vickers, a former BoE chief economist, said all major British banks should introduce a minimum 3 percent systemic risk buffer.
The BoE's models also place too much faith in the effectiveness of bank resolution rules designed to ensure smooth unwinding of banks in the event of insolvency, Vickers said.
The BoE did not immediately respond to a request for comment.
The ongoing spat between Vickers and the BoE over capital levels has irked the central bank and prompted parliament's Treasury Select Committee to review bank capital requirements.
Banks in general have argued for lower capital requirements, since holding more capital can reduce their ability to generate returns.
Vickers however said that the financial cost of increasing capital buffers is low, while the potential benefits of helping to avert another major banking crisis were huge.
"From society's point of view, this is almost free insurance," he said.
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