UK Commission Is `Unlikely' to Seek Full Break-Up of Banks, Vickers Says - Bloomberg

The Independent Commission on Banking said it's unlikely to seek a full breakup of U.K. banks, while examining "ring-fencing" investment banking from consumer banking.

"While the ICB is unlikely to favor radical reforms of narrow or limited purpose banking, their aims deserve recognition," John Vickers, chairman of the committee and former Bank of England economist, said today in a speech delivered in London. "In particular they seek by structural reform and much higher capital and/or liquidity requirements to limit or make redundant the government guarantee on risky activities."

The government-sponsored commission is halfway through its examination of whether to break up the banks to increase competition and financial stability in the wake of the banking crisis. The five-member committee reports its conclusions to Chancellor of the Exchequer George Osborne in September and produces an interim report in April.

The committee will examine whether to "ring-fence" the retail banking activities of systemically important institutions and require them to be capitalized on a stand-alone basis, while maintaining them within a single holding company, Vickers said. It is also "vital" to ensure that if an investment bank fails, depositors' money isn't put at risk, he added.

"A variant of this idea would be to require the ring- fenced retail banking activities to be relatively strongly capitalized, while adopting a lighter regulatory policy towards the other activities, if any, of banks, thereby focusing, and limiting, the need for heightened capital requirements on the key retail services," Vickers said in the text of the speech.

'Silver Bullet'

Earlier, Standard Chartered Plc's top executive told the Financial Times that the risk of U.K. banks collapsing wouldn't be reduced by enforced breakups and financially separating lenders' businesses would increase instability,

"The idea that subsidiarization is some kind of silver bullet that ensures either greater financial stability or easier resolution (of troubled banks' problems) is mistaken," Chief Executive Officer Peter Sands said in an interview, the FT reported.

Sands said the toughest form of subsidiarization, where banks would be brands operating financially separate businesses, may boost instability rather than contain risk.

Withstand Losses

The ability of banks to withstand losses needs to be "massively enhanced, and beyond the prospective requirements of Basel III" regulations agreed by regulators from 27 nations in September 2010, in the case of "systemically-important institutions," said Vickers.

The ICB will analyse the potential of contingent convertible bonds, or bail-in bonds, that convert into equity when a preset trigger is breached, he said. Consumer deposits should be "senior to, rather than on a par with, other senior debt-holders, in the creditor pecking order," said Vickers.

The British Bankers' Association "welcomes the fact that Sir John rules out recommending narrow banking and that he is not advocating a breakup of the banks," the lobby group said today in a statement.

"John Vickers is today asking the tough, searching questions about how we protect taxpayers from banks that fail," Osborne said in a statement. "The government is looking forward to receiving their report."

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Dick Schumacher at dschumacher@bloomberg.net.