HSBC gets loophole in Vickers proposals

HSBC scored a major lobbying victory yesterday after the government inserted a loophole into the Vickers Commission proposals that could exempt the bank from its most onerous capital requirements.

The bank had warned that issuing a swathe of new debt instruments as per the Vickers recommendations could cost it $2.1bn extra a year.

In response, the Treasury said that banks’ international operations could escape the requirement to build up loss-absorbing capital equal to 17-20 per cent of its risk-weighted global assets.

The bank would only be granted the exemption “provided that those operations do not pose a threat to the UK taxpayer”, the government said.

A Treasury source said that the process of qualifying for the exemption is likely to involve talks with a bank’s foreign regulators.

HSBC separately capitalises its geographical subsidiaries and, as City A.M. has revealed, Hong Kong regulators, backed by Beijing, have offered implicit support to the bank, making it well-placed to get an exemption.

The Treasury also said it would change the rules to put some savers ahead of bondholders in the queue of bank creditors. It said: “On balance, the government supports depositor preference, but believes that further analysis and consultation is needed.” Sources had said the Treasury was not keen on the idea: it is understood that some senior officials were opposed but it was backed politically. The exact form it will take is not yet clear.

KEY POINTS FROM YESTERDAY’S REPORT

● capital rules
The government has expressed support for most of the proposals in the Vickers Commission’s report: it agrees ring-fenced retail banks will need to have a 10 per cent ratio of common equity-to-risk-weighted assets and large banks will need to have “primary loss-absorbing capacity” ­– capital that can absorb losses – of 17 per cent on their entire global businesses. But there is a vital caveat: banks that can demonstrate their foreign business does not “pose a threat” to UK taxpayers can apply the recommendations only to their UK operations. This could persuade HSBC and Standard Chartered to keep their HQs in Britain.

● EU law
But it is still far form clear that the Vickers capital rules fit with European initiatives. Privately, the Treasury believes there is not enough leeway in draft EU rules to allow it to implement Vickers’ gold-plated capital rules, and that is before Brussels has even published its plans for “bail-in bonds” – bonds whose owners must take losses if a bank fails.

Lloyds branches
Lloyds has conclusively won a full victory in its lobbying against being forced to dispose of more branches. The Vickers Commission had originally suggested that the bank sell more branches, but the government has confirmed that it did not intervene in the sale to change it. Instead, it is content with a narrowed funding gap in the branches and the fact that the buyer, Co-op, already has market share.

● ring-fence
The government says that ICB proposals to force banks to ring-fence “vital banking services” (on the retail side) from other banking activities, “have provided an answer to the British Dilemma”. The ICB says ring-fencing “will insulate retail banking against contagion from the disorderly collapse of investment banks.”

● costs
Making the plans a reality will cost UK banks between £3.5bn and £8bn, causing an average gross hit of between £800m and £1.8bn to the country’s total GDP, it estimates – “equivalent to a reduction of 0.07 per cent to 0.14 per cent in the long term”. Tax receipts would fall by £300m to £650m every year. The Treasury says the economic benefits would equal around £9.5bn a year, yet banks say the cost estimates are too low.

● competition
Customers should be able to switch between banks within seven days – a proposal the banks agreed with through the Payments Council. This system should be in place by September 2013. The government has stressed that competition-monitoring authorities “are able to scrutinise the financial services market as they see fit” and “at any point” when they have reasonable suspicions.