British banks face tough regulations
London, September 13, 2011
Britain's banks face some of the world's toughest regulations under reforms outlined on Monday that require them to insulate their retail lending activities and store up billions in extra capital.
Finance minister George Osborne said he would fast-track legislation based on the proposals from the Independent Commission on Banking (ICB), which could cost the industry up to £7 billion ($11 billion) a year.
The purpose of the reforms is to avoid a repeat of the financial crisis, when massive injections of government cash were required to bail out two of Britain's biggest lenders, Lloyds and Royal Bank of Scotland.
'We're getting right up there with the Swiss in terms of having the most onerous capital regime,' said Jane Coffey, a fund manager at Royal London Asset Management.
In its report, the ICB insisted banks hold core capital of at least 10 per cent of risk-weighted assets in their domestic retail operations.
They will have to hold a further seven to 10pc of capital that can be in the form of 'bail-in' bonds - which take a loss or convert into equity to recapitalise a bank if it hits trouble - giving a requirement they hold a total of primary loss-absorbing capital of between 17 and 20 per cent, a level only the Swiss also plan to introduce.
By comparison, new global regulation due to come into force in 2019 asks banks to hold a minimum of 7 per cent in quality capital, or a likely 9.5 per cent for the biggest institutions.
The ICB estimated the annual pretax cost of its proposals for Britain's banks at between $6.3 billion and $11 billion and recommended the reforms be completed by 2019, to take into account the current economic environment.