John Vickers yesterday claimed that reforms proposed in the final report from the Independent Commission on Banking might have helped avoid collapse of banks such as Northern Rock and Lehman Brothers, which have since been deemed “too big to fail”.
“While intended as systemic reforms for the future,” said the report, “it is still useful to consider how they might have affected the failures of HBOS, Lehman Brothers, Northern Rock and RBS.”
HBOS and Northern Rock, for example, were dragged down by an over-reliance on wholesale funding and a lack of access to liquidity.
More intrusive supervision of the banks – and particularly of Northern Rock’s securitisation investments – would have helped rein in exactly how they were funding growth, argues the report, while the ring-fence would have curbed wholesale funding and required higher equity capital ratios.
RBS, nationalised by the UK government in 2008, would have benefited from “greater emphasis on equity, use of a leverage ratio, and a recalibration of risk weights”, according to Vickers.
RBS was criticised for its debt-financed buy-out of a majority stake in ABN Amro in 2007, but the report claims that the acquisition would not be allowed in the future without raising “substantial new equity”.
And Lehman Brothers, which was heavily exposed to US sub-prime mortgages and over 30 times leveraged, would have been helped by increased regulation of shadow banks and liquidity. Though Lehman would have fallen outside of the UK’s regulatory jurisdiction, the report says that minimum loss-absorbency of 17-20 per cent of risk weighted assets – as proposed by the ICB – would have restricted the impact of losses and the resulting liquidity run that drove the broker-dealer to bankruptcy.