Commission mulls higher capital ratios

BRITISH banks are braced for a week of share price volatility as the Independent Commission on Banking (ICB) readies its interim report for publication next Monday.

The best outcome for banks could be a deal that allows them to avoid splitting up their operations if they hold more capital, with sources close to the commission suggesting that capital ratios will form a core part of the report released next week.

ICB chair John Vickers has already suggested that hiving off different business lines from one another could have the same effect as holding a larger cushion of capital at group level: “If the probability and/or impact of bank failure... can be reduced by forms of separation between banking activities, then so too might capital requirements,” he said in January.

The committee is also mulling tools to make it easier to unwind failing banks, such as splitting core operations like payments off into a separate subsidiary with its own capital. The idea would be to keep essential retail functions going for a period even if the bank has collapsed.

Another possibility is a forced separation of retail and wholesale banking into separately capitalised subsidiaries.

The industry is also preparing for a raft of measures on the competitiveness of retail banking. One industry source said that, as far as the ICB is concerned, the competition issue is “the dog that hasn’t barked”.

TURNING UP THE HEAT ON BANKS | THE COMMISSION’S OPTIONS

STAY COOL
“Do nothing” is the only option more unlikely than a full-scale bank break-up

NEW CAPITAL INSTRUMENTS
Banks might have to use co-cos or bail-in bonds to encourage investor supervision

GEOGRAPHICAL SUBSIDIARISATION
Forcing banks to split their business over national lines, as HSBC does already

FUNCTIONAL SUBSIDIARISATION
Splitting up wholesale and retail banking but keeping them under the same ownership

GLASS-STEAGALL BREAK UP
All but ruled out by John Vickers; would split ownership of retail and wholesale banking

LIVING WILL
Banks will have to draw up a plans for an orderly bankruptcy

HIGHER GROUP CAPITAL 
Instead of splitting up banks, they could be given the choice to simply hold more capital

OPERATIONAL SUBSIDIARISATION
Hiving off essential ops like payments systems to keep them running for a period after a bank’s collapse