Peter Snowdon, partner in the financial services team at Norton Rose, discusses the implications of the Independent Commission on Banking’s interim report.
Peter Snowdon, partner in the financial services team at Norton Rose, discusses the implications of the Independent Commission on Banking’s interim report .
What the interim report is proposing is that retail banks will have to hold more capital and, in theory, that means the banks will be able to absorb losses.
Whether that’s going to enable them to survive the sort of crisis we had in 2008 is debatable, but it will certainly make them stronger because they’re going to have a bigger pot of regulatory capital. The more money that banks have as capital, the less they’re going to have to lend.
What the report is proposing for the retail banks is increasing core Tier 1 capital (the best-quality capital with good loss absorbency) from 7 to 10 per cent. It doesn’t sound like a big increase, but if you look at it in a different way, that’s actually a more than 40 per cent increase in the capital they have to hold. So that’s quite significant for banks and it means they’re going to have less money available to them.
There needs to be a balance between making banks sufficiently safe and enabling them to make money. Relatively speaking, the UK is a small country in an international business and it’s no good imposing lots of requirements on UK banks when US and European banks are not going to be held to the same requirements.
The report could have done more to make banks safer in the future but there has to be a compromise. The proposals in the Vickers Report are part of a number of factors that arguably make the UK less attractive to banks than it used to be. I think the regulatory environment generally is tougher. On the positive side, if competition is encouraged, we may well see new lenders entering the UK market.
There are new banks around – one or two have appeared in the past couple of years. The report recommends that Lloyds should sell some 600 branches, so that might be an opportunity for a new entrant.