New bank rules should be phased in gradually

Stuart Fraser
TODAY’S publication of the Independent Commission on Banking’s final report promises to be a watershed moment for the industry.

The proposals outlined by Sir John Vickers and his colleagues could play a huge role in shaping the future of banking in the UK. However we must be very careful that at a time when bank capital is under extreme pressure from a host of areas, none more serious than the prospect of sovereign default in the Eurozone, we do not add to that burden.

Banks have a choice; raise more capital or deleverage through cutting back on lending, across the board. Given the severe fall in the share prices of all the banks seen in recent weeks, there is clearly a lack of demand for bank equity. This is exacerbated by the current debate on “bail-ins” which will increase the risks shareholders and others will have to take on board when investing in the future.

Unless there is a change in sentiment the banks will clearly opt for the deleveraging option which will starve both consumer and business of much needed financing.

So adopt the principles of Vickers, if sensible, but delay implementation until the economy and the Eurozone area look much more stable and predictable. They may be some years ahead on current forecasts.

The financial services industry is integral to the UK economy, accounting for a total tax contribution of £53.4bn and an overall trade surplus of £40.2bn. The banks are a key component of this, not just through their direct contributions but also their huge customer base and the number of ancillary services they utilise.

The separate capital structures required by ringfencing will increase the cost of lending for wholesale operations and one report has already indicated that it could reduce economic growth by 0.3 per cent. This does not sound very serious but with GDP growth forecast at around one per cent it is a big chunk to bear now.

Last year, authorities recognised that the Basel III capital requirements needed to be phased over a sensible period in order to avoid choking off the global recovery. I hope the government recognises a similar approach needs to be taken at a domestic level with the ICB’s recommendations given the wider pressures on the UK economy and bank balance sheets.

Stuart Fraser is policy chairman at the City of London Corporation