Hester, Sands Express Skepticism Over Bank Firebreak Plans

Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester questioned government plans to force banks to erect firebreaks around their retail units, saying the costs will outweigh the benefits.

“I don’t think it will have the benefits people think it will, but I’m not trying to create a controversy,” Hester told a hearing of the Parliamentary Commission on Banking Standards in London today. “We’ll do what we’re told in any event.”

A government-commissioned report recommended in September 2011 that banks build firebreaks between their consumer and investment banks as part of plans to increase the stability of the financial system after the financial crisis of 2008. Lenders with securities operations have expressed concern John Vickers’s proposals will raise their cost of funding, reducing their competitiveness internationally.

Hester was joined by Standard Chartered Plc CEO Peter Sands, who said he too was unsure about the benefits of Vickers’s planned firebreak, or ringfence.

“I’m pretty skeptical about the benefits,” Sands told lawmakers. “The notion that one bit of a group with a ringfenced entity could get into trouble and the other bit would be completely unaffected would be unlikely to hold.”

The Treasury plans to implement the proposals in full by 2019 and is preparing to put Vickers’s plans into law.

The Vickers proposals also risk creating the perception that the ringfenced part of a bank will be safer because they would benefit from an implicit taxpayer guarantee.

Unforeseen Consequences?

“We remain concerned that placing a ringfence between retail and wholesale banking could exacerbate the inaccurate perception that ring-fenced banks will be safe, while non-ringfenced banks will be less safe,” RBS said in written evidence to the committee today.

Hester also warned there could be unforeseen consequences of the ringfencing plans for clients of a failed bank.

“You might have a customer who thought that they had a fixed-rate loan, which is a combination of a floating rate loan and a swap that made it fixed rate,” Hester said. “But actually one of those is canceled, non-operative because it’s a bust entity, and suddenly the customer is exposed” to the risk that the interest on a loan could suddenly jump.

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