The Bank of England has rejected criticisms from the architect of banking reforms that it has watered down its approach to ensuring the UK’s banking system is strong enough to withstand heavy losses. Sir John Vickers – appointed by the 2010 coalition government to design ways to avoid another taxpayer bailout of the system – has argued that Threadneedle Street is stepping back from his proposals for how much capital banks should hold. His independent commission on banking (ICB) devised the rules that require banks to erect a ringfence around their high-street operations to protect them from riskier investment banking operations. It also set out how much capital – shares and other financial instruments – banks should hold. Vickers has been arguing that the Bank of England has allowed banks to hold less capital than the ICB intended. In February, Vickers said: “The Bank of England proposal is less strong than what the ICB recommended.” However, the Bank has held firm against his calls and is, with one exception, pressing ahead with its plans as it intended. “Having carefully considered the comments received during the consultation period, the committee decided to adopt as final a framework that was broadly the same as that on which it had consulted,” the Bank said. It did, however, add a new idea intended to stop a ringfenced bank sapping a non-ringfenced bank of financial strength. The move is likely to have an impact on Royal Bank of Scotland as it has a large retail arm compared with its investment banking operations. This could push up slightly the amount of capital banks need. The Bank’s financial policy committee (FPC) – set up to look for risks to the financial system – is requiring that regulators take account of the total amount of capital the overall banks hold, not just the ringfenced operation. After publication of the report, Vickers, warden of All Soul’s College, Oxford, maintained his opposition: “It’s disappointing that the BoE has stuck to its soft policy on bank capital. Parliament gave the Bank scope to strengthen capital requirements a good deal further but it has fallen short.” The debate is focused on systemic risk buffers – a cushion of capital that is used at times of stress. “The systemic risk buffer (SRB) augments the capital buffer of a ringfenced bank or large building society, enabling them to absorb greater losses before breaching their minimum capital requirements,” the Bank said. Vickers has argued that the Bank has set these at a lower level than the ICB intended while the Bank argues that the overall level of capital in the system is much higher than Vickers intended at the time the ICB reported in 2011. The Bank said: “The overarching purpose of the SRB is to raise the capacity of ringfenced banks and large building societies to withstand stress, thereby increasing their resilience. This aim reflects the additional damage that these firms could cause to the economy in the event that they incur losses that deplete, or come close to depleting, their capital buffers, and in distress these institutions restrict the supply of critical economic functions, such as deposit taking, lending and payment services.” As it published the outcome of a consultation into the SRBs – to which Vickers was one of five respondents – the Bank indicated it intended to stick with its view on capital. Vickers said the SRB should be set at 3% for all the ringfenced banks, but the Bank has introduced a graded approach and will only introduce the top level for ringfenced banks bigger than £755bn. No bank would currently fit into this level. Overall, the Bank has concluded its current regime is correct. “The FPC’s view at its meeting on 13 May was that no new evidence had been presented since December to affect the committee’s judgment on the overall level of capital,” it said. The views on capital came as the governor of the Bank of England told George Osborne that he is keeping a close watch on the buy-to-let mortgage market and monitoring lenders for any threats to financial stability. In a letter to the chancellor, Mark Carney said he supported the need for the Bank to be given extra powers to clamp down on buy-to-let lenders as had been announced in the budget.
The Bank of England has rejected claims from Sir David Vickers that it has watered down the ringfencing process ; Vickers is arguing that the bank has held back from his proposals for how much capital banks should hold so as to make it strong enough to take heavy losses .