Statement in response to the publication of the Vickers Report1
12/09/2011

The British Bankers' Association said:

“UK banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by UK, EU and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained. The ICB’s recommendations cover the same important issues. Any further reform measures adopted by the UK authorities need to be carefully analysed and compared with those agreed internationally. It is vital that the full impact any further reforms will have on the economy, the recovery and banks’ ability to support their customers in the UK is understood.”

Background Note: SUPPORTING REFORM – ACTION UNDERWAY

The stability of individual banks, and the system as a whole, has been improved radically by the reforms that have been agreed over the past two years and will be strengthened further by measures in hand. Taken together, these will ultimately place banks on a very different footing to where they stood pre-crisis. The measures predominantly include:

• Core Tier 1 capital: international agreement has been reached on the Basel III capital accord and is close to being made a statutory requirement in the European Union in the form of the Capital Requirements Directive IV. It requires Core Tier 1 capital to be raised to 7%; the standard set by Basel II was 2% common equity supplemented by other capital which under stress provided only partial loss absorbance. As part of this, risk weights applied to instruments within the trading book have increased substantially. Notwithstanding losses, based on the definitions used by the Bank of England for its Financial Stability Report, Core Tier 1 capital held by UK banks has risen from £100bn in 2000 to £300bn at the end of last year.
• Additional capital requirements: it is accepted in Europe, but not necessarily in the United States, that there should be an additional countercyclical capital buffer up to 2.5% at the top of the cycle; discussion is advanced on a potential SIFI surcharge of up to 3%. The Basel Committee will release further proposals on the trading book this Autumn.
• Further loss absorbency: work is also being undertaken to ensure that subordinated debt is truly loss absorbing at the point of non-viability. Consideration is also being given to whether under ‘bail-in’ arrangements creditors should bear the cost of failure if the tools and powers available under resolution regimes are not sufficient to resolve a failed institution. 
• Leverage: discussions are at an advanced stage in the Basel Committee on the introduction of formal leverage ratios; in the meantime leverage in UK banking has almost halved since the period directly before the financial crisis.
• Liquidity: the need for higher liquidity requirements was a key learning point of the crisis and the volume of instruments held for liquidity purposes has increased at least fivefold. This will be formalised in a new Liquidity Coverage Ratio to apply from 1 January 2015. 
• Funding: discussions are at an advanced stage in the Basel Committee on the introduction of ratios limiting the reliance that banks and other financial institutions can place on short-term wholesale funding. This will restore the relationship between deposit-taking and lending. While further work needs to be undertaken e.g. on the underlying accounting rules a new ‘Net Stable Funding Ratio’ will apply from 1 January 2018. 
• Taxation: the annual £2.5bn UK banking levy – which is at the top end of levies introduced within the EU and elsewhere – taxes short term funding at a higher rate than long-term funding and so adds to the incentive to rely less on short-term wholesale funding.
• Infrastructure: changes are being made to require OTC derivatives to be cleared through central counterparties supported by higher collateral arrangements in effect building stronger firewalls into the financial system; payment and settlement systems overall are also to be more closely supervised.
• Recovery & resolution: the Banking Act 2009 established a Special Resolution Regime in order to provide the authorities with a legal framework and range of tools to resolve a failing institution in a manner which minimises the impact on financial stability, protects depositors and protects public funds; attention has since turned to individual institutions preparing Recovery & Resolution Plans intended to strengthen their contingency planning and to underpin the resolution regime. 
• Depositor protection: in addition to deposit insurance limits rising from 90% coverage of £33,000 to 100% of £85,000 under the FSCS scheme funded by financial institutions, UK banks lead the field in the establishment of a ‘single customer view’ designed to facilitate the continuity of essential banking services in the event of failure and 7 day payout as a backstop.
• Customer confidence: UK banks are seeking to overcome the loss of trust and confidence in which they are held and as part of this have committed to making available lending capacity and under the Business Finance Taskforce skills and resources to assist SMEs access finance.
• Banking supervision: the FSA signalled an end to ‘light touch regulation’ as part of its post-Northern Rock analysis and has since embarked upon a substantial shift in its approach to banking supervision – a process that will be continued by the new Prudential Regulation Authority.
• Accounting: the International Accounting Standards Board and the US Financial Accounting Standards Board are working together on a convergence programme aimed strengthening the key accounting standards that apply to banks and other financial institutions; this work will largely be completed by the end of the year.  Key changes include simplified measurement and classification aimed at making a clearer distinction between traditional banking and trading activity and the introduction of expected loss provisioning.
• Corporate governance: the Walker Review into the corporate governance of British-owned financial institutions made 38 recommendations spanning the size, composition, qualification, functioning and performance evaluation of boards of directors, the role of institutional investors, risk governance and remuneration.  Many of these recommendations have fed into the Financial Reporting Council’s Corporate Governance Code; others have been acted upon by the FSA and banks themselves. 
• Macro-prudential supervision: as part of the changes in the UK regulatory arrangements the Bank of England has established its Financial Policy Committee on a shadow basis and this will start work on overseeing financial stability and macroeconomic risk within the financial system. The FPC for instance will be responsible for assessing whether counter-cyclical capital weights need to be applied to particular asset classes as we work through the economic cycle.