BANKS should be forced to shrink lending even further or raise much higher levels of capital, an influential committee of MPs and peers has demanded today, claiming the government’s current plans are not tough enough.
The Parliamentary Commission on Banking Standards (PCBS) also called for the government to ensure bank regulations are reviewed periodically – approximately every five years – to test how the rules work and to threaten to break up banks that try to avoid the red tape.
Currently chancellor George Osborne wants a three per cent leverage ratio, allowing banks assets of 33 times their capital base.
But the PCBS believes a ratio of four per cent – a 25 times cap – would be safer, after hearing evidence from incoming Bank of England governor Mark Carney that Canadian banks did not collapse in part because their ratios were below 20 times.
“The Financial Policy Committee (FPC) should immediately be given the duty of setting the leverage ratio,” said PCBS chairman Andrew Tyrie.
“We have concluded that a three per cent leverage ratio is unlikely to provide a robust enough backstop.”
“To date, the government has sided with the industry in resisting calls for a higher leverage ratio.”
The government fears the backstop would constrain lending from the lower-risk institutions, like some building societies, instead of making the system safer, and prefers the main focus to be on capital levels based on risk-weighted asset calculations.
The Commission also called for the government to introduce a greater use of bail-in bonds in the UK, rather than adhering only to international standards, to make sure the cost failure at any bank is more easily passed onto creditors, not the taxpayer.
And it wants the government to tighten definitions of which activities are and are not allowed in the retail banking arms after the ring fence is implemented, particularly because it has proved difficult so far to decide exactly what counts as a simple derivative product.
Q and A: What does the commission want?
Q What is the parliamentary commission on banking standards?
A The group of MPs and peers has been taking evidence since the summer from banks, regulators, ministers and industry bodies on topics from capital weightings to pay to the structure of banks. It was set up in the wake of the Libor fixing scandal, and is issuing recommendations on how the government should adjust planned banking regulation.
Q What does it want?
A The biggest demands are on the ring fence and leverage. It wants the industry to be threatened with being broken up if banks try to dodge the ring fence, or if it is judged to be a flop. And it fears banks are still being allowed to make too many loans against a small capital base. MPs and peers also want more use of bail-in bonds, which would see bond holders lose out if banks got into trouble, and a regular assessment of risk weightings to make sure banks’ figures reflect the Bank of England’s view of reality.
Q Is the government listening to it?
A A lot of its demands have been implemented. The biggest demand from its first report – that banks face being broken up if they try to undermine the ring-fence – has been adopted. Also accepted are calls for an annual report on the workings of the ring fence and for more consideration of the duty of directors to the ring fence.