LONDON (Reuters) - Britain will resist calls to impose far stricter rules on how much banks can leverage their capital for investments and lending, insisting that there is no need to do so before 2018.
The government is forcing banks to limit leverage to 33 times their capital, in line with international regulations, and rejected a call on Monday from a panel of parliamentarians to stiffen the rules to curb risk-taking even more.
“Our view is that at this time we should follow the international approach, to press for countries to have a power to set a higher ratio for 2018 following a review in 2017,” said Greg Clark, Financial Secretary to the Treasury.
The head of the Parliamentary Commission on Banking Standards (PCBS), which has been asked to find ways to reform banks, said he was disappointed that the government did not consider a tougher rule and that current proposals to change the industry fall short of what is required.
“There remains much more work to be done to improve the bill,” Conservative MP Andrew Tyrie said.
Tyrie had also called on the government to adopt legislation that could force the full break up of banks’ routine retail operations and riskier investment banking arms if new rules designed to protect taxpayers fail.
But Clark rejected that proposal, too.
The government will instead force banks to “ring-fence” the retail operations. This would keep the two business segments within a bank’s overall control but protect the retail side from risks in other areas.
“If a future government considered that ring-fencing was no longer the right solution, then it should consider a full analysis for further reforms, and in the light of that analysis bring forward new legislation,” Clark said.
The government has said it supports a proposal by Tyrie to “electrify” the ring-fence, meaning that any individual bank that tried to find a way around the new rules could be broken up by the regulator.
Clark was speaking as he delivered the Banking Reform Bill to parliament. The bill is aimed at preventing a repeat of the need for taxpayer-funded bank bailouts after the 65 billion pound double rescue of Royal Bank of Scotland and Lloyds Banking Group in 2008.
He said the challenge was to safeguard the banking industry without imposing excessive costs.
“The system of regulation failed, as did the culture of the banking sector in not preventing or resolving the crisis without recourse to taxpayer money. That is why fundamental reform is needed,” Clark said.
Recent problems across Britain’s banks - including interest rate rigging at Barclays and RBS, mis-selling scandals and accusations of an over-aggressive banking culture - have added to calls for Britain to take a lead with financial industry reform.
Mervyn King, the outgoing Governor of the Bank of England, and his successor, Mark Carney, have indicated that they support a higher leverage ratio to curtail risk-taking.
Tyrie said that a “robust” leverage ratio was essential and 3 percent was “almost certainly too low”. The PCBS did not say what the ratio should be, but an independent commission last year suggested 4 percent, which would limit banks’ leverage to 25 times capital.
Banks have warned that the severity of the proposed reforms - more rigorous than those in France and Germany - could put British banks at a disadvantage against continental rivals such as Deutsche Bank and BNP Paribas.
The British Bankers’ Association, which has previously warned that UK banks will find it harder to raise capital and fund lending if reform is too onerous, on Monday urged the government to work with other European countries to coordinate reforms.
Editing by David Goodman