U.K. government plans to insulate consumer banks from future crises should be toughened and show less “flexibility,” said Andrew Haldane, the Bank of England’s executive director for financial stability.
The Independent Commission on Banking, led by Oxford University Professor John Vickers, in 2011 recommended banks separately capitalize and manage consumer banking activities to strengthen the financial system. The proposals have a “gray area” that may be manipulated by banks, Haldane told lawmakers.
“Flexibility in the context of the ring-fence is perilous,” Haldane said at the Parliamentary Commission on Banking Standards today. “I would personally prefer a somewhat clearer ring-fence, less gray zone, drawn in a somewhat different place than is the case currently.”
The U.K. is seeking to implement regulations including Vickers’s proposals and Basel III capital rules, while increasing competition and improving customer protection. Haldane, who last month said Occupy protesters were “right” in their criticism of banks, wants tougher rules that give lenders less opportunity to exploit regulatory loopholes, as the Bank of England prepares to take on responsibility for regulating firms as well as markets next year.
Loans to small and medium-sized businesses, trade finance, and mortgages are currently not required to be inside the so-called ring-fence. Banks are able to decide whether activities such as these need to be segregated from more risky elements of finance, Haldane said.
“They are all activities, I think that we would view as needing to remain in continuous service if a bank were to get into trouble,” he said.
As well as regulation, the parliamentary commission, led by Chairman Andrew Tyrie, will develop proposals on banking governance, transparency and conflicts of interest.
Haldane questioned whether shareholders, who he said provide funding for 5 percent of a banks’ balance sheet, should continue to exert an “enormous amount of power” over how lenders are managed. Many do not hold shares for the long term, he said.
There’s an argument for “enfranchising a broader set of stakeholders in banking,” he said. Bondholders and depositors bear a greater burden in the event of a bank failure and so should have a bigger role in bank governance, he said.
The parliamentary commission is scheduled to publish its proposals for legislation by Dec. 18.