BBA response to PCBS report1
21/12/2012

Tighter leverage ratios could increase mortgage costs for British families

Commenting on the Parliamentary Commission on Banking Standards' First report, British Bankers’ Association Chief Executive, Anthony Browne said:

“We welcome this report which broadly endorses the Government’s approach to banking reform. The industry is strongly committed to taking the necessary steps to ensure that taxpayers are never again asked to bail out failing banks.

“We welcome the Commission’s recognition that the banking industry needs time to prepare for the huge structural changes that creating a ring fence would require.  While it is clearly important to retain a degree of flexibility around the scope of the ring fence it is equally critical that any new system creates regulatory certainty for banks and their investors.  Too much uncertainty will deter investment and could hurt London’s position as the world’s leading financial centre. We will work with parliamentarians to try and achieve the right balance.

“We continue to believe the Government is correct to seek to align the leverage ratio requirements with international standards. The Commission’s support for a tighter leverage ratio that would come into force several years earlier than the rest of the world could cause real problems. Increasing the leverage ratio would restrict the number of mortgages banks could agree to and ultimately lead to more expensive mortgages for British families.”

For more information please call Paul Stephenson on 0772 561 0696

Notes to Editors

BCBS First Report: 21st December 2012-12-20

General

• Report shows Commission has thought very fully about many of the key issues arising from the ICB’s recommendations and not just the immediate ones arising from the draft primary legislation.
• Overall they support the Government’s proposed approach but wish to see disciplines built in to ensure the integrity of the ring-fencing arrangements.
• They also rightly wish to see greater assurance about Parliamentary scrutiny of both the primary legislation and the accompanying secondary legislation which will to a large degree give definition to the ring fence and recommend e.g. that a small ad hoc committee of both Houses be established in support of the affirmative procedure for the secondary legislation.
• They recommend the inclusion is FSMA of a legal duty on directors to preserve the integrity of the ring fence. (Paragraph 222)
• The de minimis exemption is supported. (Paragraph 200)
• They do not question the 2019 deadline for full implementation of the ring-fence but consider the extended timeline to necessitate a high degree of transparency during the implementation phase. (Paragraph 125) 

Held over until next year

They have related that they plan to give further thought on some key issues:

• Whether ring-fencing should be augmented by an equivalent to the Volcker rule. (Paragraph 96)
• Whether further measures are needed in respect of large systemic banks and investment banks. (para 104)
• Whether the ‘continuity’ objective is sufficiently defined. (Paragraph 130)
• The provision of ‘simple’ derivative products by the ring-fenced bank is supported on the proviso that these are defined in the primary legislation. (Paragraph 194)
• They recognise concerns expressed about trade finance and the ability to support exporters and therefore recommend that the Treasury undertakes a full separate consultation exercise on this next year. (Paragraph 209) [This has been a key concern for the industry]

Headline issues

• The Commission proposes that the ring-fence be ‘electrified’ by which they mean that there should be reserve powers to enable the regulator to demand full separation of an individual banking groups if there was a risk that the objectives for the ring-fence would not be met and that there be a general reserve power enabling full separation across the sector if need be. (paragraph 165); it is recognised however that a recommendation of this significance ‘will require a number of limitations and safeguards including an independent review of ring-fencing effectiveness (paragraph 171) [This process will be critical and if such powers are to exist it will be important that such reviews are technical and not political in nature]
• They recommend that regulators be given power to require a holding company structure and expect this power to be exercised. (Paragraph 228)
• They recommend that the Treasury and the Bank of England establish a joint group to prepare and publish a full report on the implications for resolution of depositor preference and the scope and extent of deposit insurance including the feasibility of a voluntary scheme for deposits over £85,000. (Paragraph 279)
• They recommend that the leverage ratio be set substantially higher than the minimum 3% required under Basel III but acknowledge that this would pose particular problems for some building societies. (Paragraph 259) [A concern the BBA would have would be if this constrained prime mortgage lending]