Sir John Vickers, the Oxford academic who chaired the Independent Commission on Banking, said that in a “blue-skies” world banks’ core tier one capital ratios would now be 20 per cent, rather than the 10 per cent recommended by the ICB that has already become the norm for UK lenders.
The ICB’s conclusions – including the commission’s central recommendation that the high-street operations of broader “universal banks” should be “ringfenced” from riskier investment banking activities – are in the process of being translated into law. However, the commission’s 10 per cent capital recommendation is already a de facto reality for large UK banks. Policed by the Prudential Regulation Authority – the arm of the Bank of England that oversees the sector – lenders today boast capital levels that are on average three times higher than before the crisis took hold in 2008.
Nonetheless, reformers such as Sir John want to go much further. He said “the skies are cloudy” at the moment but once they cleared policy-makers should further strengthen capital levels in the banking sector.
Bank supervisors in the US, UK and Switzerland have recently shifted their focus from core tier one ratios – which relate equity capital to assets weighted for risk – towards a broader catch-all leverage metric, which relates equity to total assets. By that less manipulable measure, supervisors argue, some banks are still undercapitalised.
The incoming Basel III global rulebook demands a 3 per cent leverage ratio, sometimes expressed as a leverage multiple of 33 times, though some countries have recently gone further, with the US planning a ratio requirement of up to 6 per cent.
Sir John continues to believe that the ICB’s ring-fence idea, which has yet to be taken up elsewhere in the world, is a crucial mechanism to reduce banks’ danger to taxpayers. “The consequences of the crisis were worse because of the unstructured nature of universal banks”, he told the FT. “There were no firebreaks, and governments had to rescue failing banks whole, with no opportunity for more targeted measures.”
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