Vickers Says Bank Rules to Cut Government Subsidy 80%

Full implementation of international and U.K. regulations, including plans to insulate consumer lenders, may cut the implicit government guarantee of the banking system by about 80 percent, former Bank of England Chief Economist John Vickers said.

“The way to cure the too-big-to-fail problem, which is the other side of saying the implicit guarantee problem, is a set of reforms on capital, liquidity, structure and all the rest of it,” Vickers, who led the government-sponsored Independent Commission on Banking, told parliamentarians in London today. “That would take us most of the way.”

Vickers in September 2011 recommended banks build fire breaks between their consumer and investment banks as part of plans to increase the stability of the financial system. The proposals, which are being put into law by the government also recommended that banks within the firebreaks hold more capital than required by the Basel Committee on Banking Supervision.

The Basel III rules require banks to hold more 7 percent of risk-weighted assets in core capital, and the biggest lenders, so-called systemically important financial institutions, to hold as much as a further 2.5 percentage points in capital.

Fully Split

Vickers said that while fully splitting up the banks wouldn’t necessarily increase financial stability because it reduces diversification, banks could be forced to separate if they didn’t implement the changes.

“My instinct would not be to resist that suggestion,” Vickers told the Parliamentary Commission on Banking. “It would be important to ensure that if such a power were introduced that it didn’t fall foul of wider European law.”

The Treasury has said it plans to pass all legislation relating to Vickers recommendations by 2015 and fully implement them by 2019.

Banks will have to build so-called high and flexible firewalls between their consumer and investment operations. 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.

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