The Banking and Strategy Initiative

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London, London! Trying a new R for regulation in the UK – Part I >> Ringfencing Vickers' new law

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.

Bank of England, Threadneedle Street, London, ...

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As mentioned , in earlier analyses of the new laws, these are primarily a separate set of laws envisioned to showcase Britain as an individual destination. To that extent International Banks will find discussions on how to approach the market, the regulation and the personalities in the discussion A DAILY ARGUMENT  adding to the cost of doing business in the UK primarily targeting players like Deutsche Bank with reliance on short term notes for Capital, surcharged already, like JP Morgan by 2-2.5% for capital as per Basel 3 or Santander,  working hard to set up retail presence in the British Capital.

The primary object of the Vickers commission was to underwrite consumer safety as the government authority, which it has proposed by ringfencing retail banking from other bank businesses.

As mentioned in the discussion on Financial Policy committee to be set up as super monitor by an act of parliament, the regulations highlight a unique British attempt which will proceed along traditional British event based policy, and has already exempted banks like HSBC and maybe Barclays if it can expand overseas again, from requirements of keeping loss reserves in Capital. The proposed Loss reserves conditions stipulate that the Banks must be able to remain operating companies on their own ( thus without the government’s financial support) in case of extraordinary losses of up to 17-20%

The Vickers Commission report recommended that retail operations of banks be ring-fenced from the Corporate investment Banking business of the banks and have been accepted as such by the Chancellor’s statement in Parliament. Thus the Independent Commission on banking’s proposed regulation will be put into operation as separating investment Banking activities from the banks’ operations and asking the banks to raise new securities to the minimum value of 17% of their pertinent (Risk weighted)  “UK assets” and “non UK assets” that could thus impact its Balance sheet value. RBS for example has lost more than 50% of its market value but may be not so far behind on its Risk Weighted assets on the balance sheet yet either. The Chancellor George Osborne and Finance and Banking Secretary (Busines Secy) Vince Cable promised all laws to be in force before the Parliament’s term expires in 2015, a new challenge from the earlier target of 2019.  RBS of course would be guided by the government, with its stak eof 83% into two separate units for retail and investment banking, Barclays will be advised to do the needful and may look for more non UK assets even as BarCap also continues tio turn in more than 9/10ths of the profit

Retail Operations

The ICB report asks all “European” retail assets, liabilities and investment banking operations to run and report  as legally independent subsidiaries with independent capacity to absorb losses ( by sale of securities / Tier I & Tier II capital to absorb a minimum 17% – 20% of their book (Risk weighted assets)  on their own steam (govt pays later?) RBS right now will be reducing its investment banking assets , and that would also be an option to others to avert the increased costs of raising such loss absorption capital.

Deposit Insurance

The ICB proposals as agreed mandate that Deposits insured by the government’s Financial Services compensation scheme ( as redundant as the FDIC in US or other such devices covering a first $10k or such limit on deposits) will ring ahead of unsecured creditors in a liquidation. The impact is salutory but makes a point.

Residential Mortgages

(Not as Vickers / ICB report impact) in a related development, new laws for mortgage underwriting were also passed yesterday requiring underwirting to ensure that payin gcapacity of the borrower does not include volatile sources like the value of the house and covers not just interest payments but both principal and interest payments while giving the loan and while increasing the interest on the loan at any time

Capital Requirements are however determined by Basel 3

As FPC discussions already mention, it cannot be operationalised thru larger Capital requirements alone as they are capped by EU harmony regulation and will be as per Basel 3 surcharges for short term inter bank capital etc. As HSBC and Stanchart are able to show ” that they do not pose a threat to UK tax payers” they would not have to sell those additional securities equal to 17% of UK and non UK assets, allowing them to raise $600 mln in such securities in the case of HSBC

 

OVERALL IMPACT

A bank with UK taxpayer impact assets from UK and Europe/ECB of GBP 200bln would probably look at a RWA book of GBP 270 mln or USD 400 mln, requiring a Capital of $36 mln plus surcharge on liquidity buffers from Basel of approx $6 mln and a Loss Absorption capital ( Securities covenant for which would probably also allow leeway like COCO bonds’ call options/sweeteners without strict requirements of Tier I capital under Basel) of $80 mln. HSBC was initially expecting a cost of $2.1 bln for the bank.

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