The Banking and Strategy Initiative

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London, London! Trying a new R for regulation in the UK – Part II >> Empowering the FPC

Caution: The contents of this law are not applicable to non existent European collateral, leveraged balance sheets of Central Banks, International operations of global banks, but may be applicable to local branches of International banks

Vickers committee recommendations to safeguard UK banking highlighted the difference in UK ground conditions as without  the fights for collateral or the covenants of a global reserve currency / safe haven, the Britishers’ resolve to put things in order reads like a list of almost too new to fail laws that will be tried for the first time and in most statutes, be unique to the island nations banks and Financial services operations.

A  welcome added advantage for HSBC already doing the rounds is that additional loss capacity restrictions being put on banks in this edition are not to be applied on Capital and assets pertaining to its international business.

A flip side not discussed yet will be that banks like Santander and Deutsche Bank with large operations would have to not just ring fence their UK operation but likely provide extra capital so that their UK operations remain solvent even after a 17-20% loss on the UK assets.

Here is the law as it has been cleared in its distinctive set of features that make it a consumers delight from the Cameron government.

A. The ring fencing timetable has been pushed up to 2015, the tenure of this parliament

B. The regulator is missing teeth and will be recommending its own policy tools as the Financial Policy Committee in the next few weeks, trying to operate under EU law for capital requirements while maintaining Britain’s desirable extra to cover systemic risk which is not permitted by EU law for some heads such as “Capital Requirements”

C. The FPC legislation comes on board in 2012 , maybe 2013 with all clauses

 They include the power to direct banks to hold more or less capital and easy-to-trade assets depending on economic circumstances; requiring financial institutions to clear trades through central clearing houses; and powers to vary the terms and conditions of mortgages and limit bank payouts to staff and shareholders.(WSJ)

The link to the Bank of England – FSA document is available here

The Committee identified three broad categories of policy tool over which it thought it might initially need to have directive powers:

  • the balance sheets of financial institutions;
  • the terms and conditions of transactions in particular financial markets; and
  • market structures.
(opinion: governing contracts applicable , and hinting that regulation will be event based, directing banks at pecuniary turns of the banking market to stop trading securitised securities, trade capital in Repos or other such interventions based on what crisis is read by the regulator, leaving leverage ratio limits and counter cyclicals buffers as flexible marks to be lobbied)

D. Most of the overseeing capacity of the regulator WILL BE COMPROMISED by the market situation forcing banks to continue deleveraging and reassessing ownership of Financial Services assets in international businesses to avoid adding ringfencing “taxes” on additional capital etc

E. According to a market commentary by Mervyn King, (Bloomberg) the sensitive mandate is likely to be a tough one ( read, continuous regulation and monitoring is a foolhardy ideal and we won’t be really in charge)

The FPC will have the power to make recommendations to the Prudential Regulation Authority and the Financial Conduct Authority, as well as direct them to adjust specific macroprudential tools where necessary.

“Recommendations are likely to be the most suitable course of action,” the paper said. “But the power to direct the PRA or the FCA to make policy changes is a necessary complement to recommendation powers. Directions could be particularly valuable in circumstances in which action is required urgently.”

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