Traditional banking model? R.I.P. says UK regulator
LONDON (Reuters) - Banks need a new business model and the threat of forced separation of investment and retail banking should be put into law to help curb risky behaviour, UK regulators said on Wednesday.
Andrew Haldane, director of financial stability at the Bank of England, told a panel of lawmakers that Britain's Vickers plan to impose extra capital on the deposit-taking arms of banks by 2019 to make them safer, may not be enough to protect the taxpayer.
UK regulators have become among the most hardline in the world after taxpayers had to rescue many lenders in the crisis.
The lawmakers will scrutinise a measure to put Vickers' proposal into law and Haldane urged them to consider inserting a "backstop" so that if the "ring fence" leaked or was hard to police, regulators could forcibly split up the banks into retail and investment units.
"That could be a clever way of ensuring Vickers is implemented faithfully and achieves what it is meant to achieve," Haldane said.
The ring-fence will comprise deposits and overdrafts, leaving flexibility on other products, but Haldane said this "grey area" created perilous risks for regulators.
"There is a case for moving the ring-fence outwards to mandate a broader set of activities that lie within," he said.
Small business loans, trade finance and mortgages should be inside the ring-fenced arm which should have its own governance, risk management, balance sheet, treasury operations and even human resources to ensure the right culture, he said.
Andrew Bailey, Britain's top banking supervisor, said in a speech released on Wednesday that banks will have to ditch their reliance on the traditional profitability benchmark.
"The high return on equity with low cost of equity business model is dead," Bailey said.
Heavy regulation, falling trading volumes and weak economy means that for many banks the cost of capital is now higher than their return on equity, unsustainable over the longer term.
The Bank of England's new prudential regulation authority (PRA), likely to be headed by Bailey, becomes Britain's main banking supervisor from April.
The PRA will aim to move away from the "box ticking" approach of the past and be more judgement led in its approach which Haldane likened to a swat team pursuing "random sampling".
The UK government wants the PRA to have competition as well as a financial stability remit.
The lawmakers, members of a commission on improving standards in banking that will propose legislation, also want to end the stranglehold of Barclays (BARC.L), HSBC (HSBA.L), Lloyds (LLOY.L) and RBS (RBS.L) who collectively hold 80 percent of high street bank accounts.
But Haldane said regulators would end up being "structurally schizophrenic" riding two horses if they had two objectives.
He also said substantial investments by banks in upgrading the payments system were needed.
Many top banks were also unable to "simply add up the numbers" and calculate risks across the group, he added.
The risk-based Basel rules forcing banks to hold more capital from January were also built on the "shakiest foundations".
It would be a thankless task of deciding how much capital banks should hold against each asset, a game of "cat and mouse" that no regulator can win, Haldane said.
But Bailey cautioned against ditching the risk-based approach in favour of simpler indicators.
"Simplicity is not about one-club golf, and it is not about abandoning risk-based regulation," Bailey said.
(Reporting by Huw Jones; Editing by Elaine Hardcastle)
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