Banks in sigh of relief over Vickers rules

JOHN Vickers has privately reassured Britain’s biggest banks that they will not need to issue billions in complex new debt instruments to comply with his recommendations.

City A.M. understands that several anxious lenders sought informal clarification from Vickers’ Independent Commission on Banking (ICB) recently and were told definitively that they will not have to invent and sell new “bail-in bonds”, as parts of the ICB report had appeared to suggest.

Instead, a technical change in the law, which would force existing bondholders to be “bailed in” should the bank fail, suffices to fulfil Vickers’ new capital requirements.

Debt costs for banks spiked following the publication of the ICB’s final report, which recommended that major UK banks should have to issue bail-in bonds equal in value to 7-10 per cent of their risk-weighted assets.

Bail-in bonds are an untested asset class, whose cost analysts have been trying to calculate. UBS’s John-Paul Crutchley suggested that the recommendation would cause banks to “shrink or relocate”.

And yesterday, ICB critic and former City minister Lord Paul Myners told an audience hosted by the Association of Corporate Treasurers: “The bail-in debt market is almost non-existent and yet Vickers is assuming that very substantial amounts can be raised.”

Having obtained clarification from Vickers, banks are now in discussions with the UK Treasury over the details.

Despite the reassurance on bail-in bonds, however, some lenders with low asset-to-deposit ratios are worried that Vickers’ capital rules could inadvertently force them to increase their reliance on wholesale funding.

HSBC and Standard Chartered are less reliant on wholesale cash than rivals and instead meet the vast majority of their funding needs out of customer deposits, which are viewed by regulators as a safer source of liquidity.

Yet under Vickers’ proposals, they could potentially be forced to issue more expensive debt to meet his loss-absorbing requirements. Because the debt would be calculated as a proportion of their huge global balance sheets, it could prove extremely costly.

It is understood that discussions are now underway between the Treasury and banks to remove the perverse incentive in the proposals.