According to Reuters, the Bank of England is too optimistic about being able to close big banks smoothly if they run into trouble and lenders should hold far more capital to keep the financial system safe, the architect of a major banking reform said on Tuesday.
The Independent Commission on Banking (ICB) chaired by John Vickers recommended after the financial crisis that banks ring-fence capital equivalent to 3 percent of risk-weighted assets, while the Bank of England says the level should be 1.3 percent.
In response to previous criticisms from Vickers, BoE Governor Mark Carney published a 13-page letter to parliament on Friday, setting out how why banks in Britain generally hold enough capital to act as a buffer against systemic risk.
But Vickers told an audience including former regulators, central bank officials and Clara Furse from the BoE’s Financial Policy Committee that the assumptions underpinning the bank’s arguments were not realistic.
“The BoE should think again,” Vickers said in his speech at the London School of Economics on Tuesday.
“The Financial Policy Committee should use to the full the opportunity it now has to make UK retail banking safer, and introduce a 3 percent systemic risk buffer for all major ring-fenced banks,” Vickers, a former BoE chief economist, said.
“With more prudent and realistic assumptions, the BoE’s own analysis indicates the need for that. The BoE’s current proposal falls short,” he said.
The spat between Vickers and the BoE over capital levels has irked the central bank and prompted parliament’s Treasury Select Committee to review bank capital requirements.
Carney has said no significant extra capital was needed because banks face other requirements, such as a counter-cyclical capital buffer, and changes that make them easier to close down – two reforms which Vickers said were no foolproof substitute for higher capital.
Under current plans, the deposit-taking divisions of banks must have the extra ring-fenced capital in place from 2019.
The reform is considered among the toughest of its kind in the world and has forced HSBC, Barclays, Lloyds and RBS to make internal changes.
Vickers’ comments also come at a time when the finance ministry wants a “new settlement” with banks, which has raised concerns among some lawmakers that banking rules are being watered down.
