Britain's banks face some of the world's toughest regulations under reforms outlined on Monday that require them to insulate their retail lending activities and store up billions in extra capital. Finance minister George Osborne said he would fast-track legislation based on the proposals from the Independent Commission on Banking (ICB), which could cost the industry up to 7 billion pounds ($11 billion) a year.
--- Banks need loss-absorbing capital of 17-20 percent
--- Osborne says will stick to ICB timetable
The purpose of the reforms is to avoid a repeat of the financial crisis, when massive injections of government cash were required to bail out two of Britain's biggest lenders, Lloyds and Royal Bank of Scotland. "We're getting right up there with the Swiss in terms of having the most onerous capital regime," said Jane Coffey, a fund manager at Royal London Asset Management.
In its report, the ICB insisted banks hold core capital of at least 10 percent of risk-weighted assets in their domestic retail operations. They will have to hold a further 7 to 10 percent of capital that can be in the form of "bail-in" bonds - which take a loss or convert into equity to recapitalise a bank if it hits trouble - giving a requirement they hold a total of primary loss-absorbing capital of between 17 and 20 percent, a level only the Swiss also plan to introduce.
By comparison, new global regulation due to come into force in 2019 asks banks to hold a minimum of 7 percent in quality capital, or a likely 9.5 percent for the biggest institutions. The ICB estimated the annual pretax cost of its proposals for Britain's banks at between 4 billion and 7 billion pounds and recommended the reforms be completed by 2019, to take into account the current economic environment.
The British government backed the report, saying it would help boost the economy and protect taxpayers. "(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," said Osborne.
"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," he added. Business minister Vince Cable from the Liberal Democrats, the junior party in the government, also backed the report, reducing fears that disagreement among the coalition partners could hold up legislation. "(Vince Cable) welcomes the recommendations and thinks it's an excellent report," his spokeswoman said.
Britain's "Big Four" banks - Barclays and HSBC as well as Lloyds and RBS - have fought against tough new regulation on top of EU and global reforms. They form a powerful lobby since financial services contribute about 10 percent to the UK economy. "The banking industry ... is a much more important component to the UK than it is to other countries, which is why the gold-plating of the regulatory regime which is being implemented globally has to be sensible and not push us into a corner where the banking industry here is uncompetitive," said David Miller, fund manager at Cheviot Asset Management. Barclays and RBS are expected to be hardest hit by the reforms because they have the biggest investment banking units.
The report was better news for Lloyds as it backed away from an earlier recommendation that it should sell more branches than the 632 regulators have told it to offload following its absorption of Halifax parent HBOS during the crisis. The proposals will impose a ring-fence limiting the extent to which a bank can use money in its retail arm to fund investment banking activities, thus increasing its funding costs, which will likely hit its profits and possibly make it harder to lend to businesses. HSBC, Standard Chartered and Barclays have all said they could leave Britain if regulations become far more onerous than elsewhere.
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