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U.K. Softens Vickers’ Bank Proposals, Prompting Criticism

Chancellor of the Exchequer George Osborne softened the recommendations of the Independent Commission on Banking on how much capital lenders must hold, prompting criticism from the report’s author.

In the government’s first detailed response to the proposals made by former Bank of England Chief Economist John Vickers, the Treasury said that banks will only have to hold 3 percent of capital against total assets in line with Basel III requirements rather than the 4.06 percent recommended in the ICB’s September report. That will make it less costly for banks.

“The white paper proposals are far reaching, but on some points, such as limits on the leverage of big banks, we believe they should go further,” Vickers said in an e-mailed statement today. We “urge the government to resist pressure to weaken their effectiveness,” he said.

Osborne is adopting the overwhelming majority of the Vickers report, which recommended that banks separate consumer and investment banking operations and each have a separate board with at least two thirds of their members sitting on only one board. Banks will also be forced to have their own risk committees.

“This paper now ensures that the government is more willing to toe the Basel III, European line,” Chirantan Barua, an analyst at Sanford Bernstein Research in London, said in a note to investors. “This will come as a big relief to the U.K. banks.”

Currency Hedging

In a further softening of the ICB’s proposals, Britain will allow the consumer units of banks operating in the U.K. to hedge currencies and some simple derivatives for small and mid-sized companies. More complex derivatives trades won’t be allowed. Vickers last year proposed all those functions remain outside the consumer operations of a bank.

The Treasury said banks’ consumer units should boost the amount of loss-absorbing equity and debt they hold to 17 percent, at the low end of the range suggested by Vickers who proposed they hold as much as 20 percent.

The opposition Labour Party attacked Osborne for not presenting the plans in Parliament. Ed Balls, who shadows Osborne in Parliament for Labour, said the government has “watered down and fudged” Vickers’s plans following its failure to get international backing for the reform package.

The Treasury plans to pass all legislation relating to Vickers recommendations by 2015 and fully implement them by 2019, resisting pressure from the industry to slow down their adoption. Banks will have to build so called “high and flexible” firewalls between their consumer and investment operations. Their overseas operations will be exempt if they are deemed to pose no potential risk to taxpayers. Consumer banks will be prevented from holding equity of the other units.

Depositors Protected

The proposed legislation will also include plans to increase competition and put bank customers first among creditors in the event of a failure, the so-called “depositor preference” advocated by Vickers.

Osborne will exempt smaller banks from the rules so that only institutions big enough to threaten the viability of the financial sector have to implement them. Banks such as HSBC Holdings Plc with operations outside the U.K. that aren’t a risk to financial system will be excluded from having to hold larger loss-absorbing buffers.

Vickers’s report proposed that the units inside the firewalls will handle all checking accounts, mortgages, credit cards and lending to small and medium-size companies. As much as a third of U.K. bank assets, or about 2.3 trillion pounds ($3.6 trillion), and 90 percent of deposits will be included, according to the recommendations. Trading and investment-banking activities will be outside the firewalls.

The proposals will cost U.K. banks as much as 7 billion pounds a year, while the annual benefit to the economy will be 9.5 billion pounds, the Treasury said.

The plans “balance safety with the needs for growth,” the British Bankers’ Association Chief Executive Officer Angela Knight said in a statement today. Questions remain over costs and banks need to be assured they won’t be subject to competing rules, Knight said. It is also unclear how the plans will affect U.K. banks that mainly operate abroad, she said.

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