Bloomberg: U.K.’s ‘Moderate’ Bank Report Calls for More Capital, Sales

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U.K.’s ‘Moderate’ Bank Report Calls for More Capital, Sales
By Jon Menon and Gavin Finch - Apr 11, 2011 7:55 PM GMT+0900

The Independent Commission on Banking recommended the U.K.’s biggest banks should hold core Tier 1 capital levels of about 10 percent, implement plans for an orderly bankruptcy and ring-fence consumer units in what it termed a “moderate” set of proposals.

The commission acknowledged the concerns of some banks, including Barclays Plc (BARC), by shying away from an enforced separation of investment banking units in its 208-page interim report published today. The commission also called for Lloyds Banking Group Plc (LLOY) to divest more branches than the 600 already being offered for sale.

“Rather than pursuing more radical policies towards capital or structure, the approach outlined is a combination of more moderate measures,” the report said. “They nevertheless entail costs to banks, some of which fall on the wider economy.”

John Vickers, 52, chairman of the commission and former Bank of England chief economist, was asked by the government last year to make recommendations to ensure greater competition and the safety of British banking in the event of another financial crisis. Today’s publication opens the way to five months of lobbying before the final report is handed to Chancellor of the Exchequer George Osborne and Business Secretary Vince Cable in September.

“We absolutely reject the notion that we bottled it,” Vickers told reporters at a press conference in London today. “In no sense at all are these half-measures. These are absolutely far-reaching reforms,” he said.

Shares Rise

“The universal banks such as RBS and Barclays fare best from the report,” said Joseph Dickerson, a banking analyst at Espirito Santo Investment Bank. “The key negative in the report is the prospect of further branch divestitures at Lloyds which is currently unquantifiable,”

Barclays rose 3.3 percent to 306.8 pence as of 11:47 a.m. in London trading, while Royal Bank of Scotland Group Plc (RBS) rose 2.1 percent to 44.34 pence. Lloyds was 0.2 percent higher at 62.29 pence and HSBC Holdings Plc (HSBA), Europe’s biggest bank, declined 0.6 percent to 660.9 pence. The benchmark FTSE 100 Index gained 0.2 percent.

Officials at Barclays, HSBC, RBS and Standard Chartered Plc (STAN) declined to provide an immediate comment.

The report “does deal in a very thorough way with how we tackle this problem of banks that are too-big-to-fail and on a taxpayer guarantee,” Business Secretary Vince Cable told the British Broadcasting Corp. today. “I’m pretty sure we will come up with a solution to that problem thanks to this report.”

‘Vital’ Consumer Banking

Vickers recommended banks put their consumer operations into a separately-capitalized subsidiary within the holding company to protect depositors and enhance stability. Such a structure would be “less costly” for banks than full separation, the report said. In the event of a bank collapse the “vital” consumer banking operations could be kept running while the investment banking activities are able to fail safely, the report said.

“A retail ring-fence can preserve the possibility that the wholesale/investment banking operations of a universal bank can save the retail banking operations while curtailing the possibility that they can sink them,” the report said.

The Basel Committee on Banking Supervision said last year that all banks had to maintain a reserve of at least 7 percent Core Tier 1 capital ratio. Banks that are considered too-big-to- fail may be required to maintain 10 percent, people familiar with the discussions said last month.

Taxpayer Risk

“The banks’ cost of capital is going to go up because investors are going to have to take the risk that we the taxpayer have been taking,” Vickers told the BBC today. “That would affect particularly the investment banking side of the operations more than the retail banking side.”

The annual cost of the ring fencing will be “significantly” lower than the 12 billion-pound ($20 billion) to 15 billion-pound estimate already in the public domain, the commission said.

“There’s nothing in the report that’s too onerous for the banks,” said Christopher Wheeler, an analyst at Mediobanca SpA in London. “This is certainly not as tough as the man in the street would have hoped. It looks like good news for all the banks, other than Lloyds.”

Two of the U.K.’s biggest lenders, Barclays and HSBC, had threatened to relocate their headquarters overseas if they were forced to spin off their investment banking units. The report said that its plans would help London by bolstering the banks.

Global Financial Center

“More resilient banks are therefore central to maintaining London’s position as a leading global financial center, not a threat to it,” the report said.

Lloyds plans to sell branches to comply with a European Union ruling after receiving more than 20 billion pounds in state aid should be “substantially enhanced,” to create a “credible challenger,” the report said. Lloyds became the U.K.’s biggest provider of current accounts, known in the U.S. as checking accounts, and the biggest mortgage provider with its takeover of HBOS Plc during the 2008 financial crisis.

The London-based bank’s Chief Executive Officer Antonio Horta-Osorio said in a statement that he was “surprised” by the commission’s suggestion, which was “not in the interests of our customers” and was based on limited evidence.

Debt Capital

The commission “would not want to preclude the possibility” of government-owned Northern Rock Plc being combined with Lloyds’s asset sales, the report said.

Vickers also suggest making consumers' bank deposits rank senior to unsecured creditors to create a bigger buffer to absorb losses. Contingent debt capital and debt which converts into equity in the event of a bank crisis may lead to “improved loss absorbency,” the report said.

David Fleming, national officer at trade union Unite which represents some bank workers, described the report as “tinkering at the edges.” The report was “another missed opportunity to protect customers and staff from the corporate greed which brought disaster to our economy,” he said in an e- mailed statement today.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net