LONDON The Bank of England is not taking a tough enough line on how much equity capital commercial banks must hold against potential losses, the chairman of a major government inquiry into the sector said on Monday.
John Vickers, whose Independent Commission on Banking's 2011 report led to stricter laws aimed at reducing the damage from future bank collapses, said the BoE's latest proposals on capital requirements did not go far enough.
"The BoE is proposing substantially milder equity requirements for British banks than did the ICB. The wisdom of this policy is questionable," Vickers wrote in an opinion piece in the Financial Times.
The BoE has said banks should hold total capital buffers of 13.5 percent of risk-weighted assets and are already near this level. But it has added that in the long run this level could fall to 11 percent, reflecting better regulation and risk assessment, and ways to unwind banks if they get into trouble.
Vickers said the BoE should play safe when it comes to equity capital levels.
"No one knows the right answer. Given the awfulness of systemic bank failures, ample insurance is needed, and equity is the best form of insurance," he said.
European banks' share prices fell sharply last week, driven by fears that the lenders' businesses were vulnerable in the current global economic climate.
But UK banks have objected to BoE capital requirements in the past, arguing they impose unnecessary costs.
Chancellor of the Exchequer George Osborne has been keen to ensure Britain remains an attractive centre for banks to operate from, a more accommodating attitude that was rewarded on Sunday when HSBC Holdings (HSBA.L) announced that it had decided to keep its head office in Britain following a 10-month review which had looked at the idea of moving back to its original home in Hong Kong.
The requirement triggered by Vickers's 2011 report for HSBC, Barclays (BARC.L), Lloyds Banking Group (LLOY.L) and others to 'ring-fence' their high-street retail banking arms from 2019, is among the toughest banking reforms made in the world since the 2008 crisis.
(Reporting by David Milliken and Huw Jones; Editing by Greg Mahlich)