BOE: Banks Must Prove Vickers Waiver Won’t Harm Stability

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The Bank of England said lenders must prove that leniency won’t undermine financial stability when they seek a waiver to the so-called Vickers rule designed to separate retail and investment banking activities.

Banks that want to opt out of the rules must demonstrate that their “proposed governance arrangements will compensate for any potential weakening of the regime,” the Prudential Regulation Authority, a BOE unit, said on its website on May 27. The PRA has the power to waive the rules if they would prove “unduly burdensome” for a particular bank.

“A proper process must be followed for each decision to ensure the outcome does not undermine the robustness of the ring-fence or the PRA’s wider objectives, and to ensure consistency between similar cases,” the London-based PRA said.

The PRA requires lenders with more than 25 billion pounds ($38.5 billion) of deposits to erect firebreaks between their consumer-lending operations and investment banks. The proposals, drafted by John Vickers’s Independent Commission on Banking, seek to ensure that core services such as consumer deposits and payments will be protected if riskier divisions incur losses and have to be shut down.

The BOE said it would publish another consultation on the bank ring-fencing requirements before the end of the year. The central bank plans to issue final rules in the first half of 2016.

Under the U.K.’s proposed rules, which come into force in 2019, a ring-fenced bank must have its own board of directors independent from the group board.

‘Wider Package’

Lloyds Banking Group Plc, Britain’s largest mortgage provider, was said to have asked for an exemption from the rule in January. The bank said on May 27 that it supports ring-fencing as part of a “wider package” of reforms.

“A combination of ring-fencing, enhanced resilience of the capital structure and credible resolution schemes should reduce both the probability and impact of bank failures, safeguard the key economic functions performed by U.K. retail and commercial banks, and also reduce the risk of contagion from difficulties in investment banking,” the bank said in an e-mailed statement.

The European Union has struggled to agree on common standards on bank structure, as the U.K. has pushed on with its own reforms. A European Parliament committee rejected a proposed negotiating position on a bank-separation bill in a May 26 vote, sending the assembly back to the drawing board.

The European Commission, the EU’s executive arm, presented a draft bank-structure plan more than a year ago as part of its attempts to tackle too-big-to-fail lenders. A final law would require approval by parliament and national governments.

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