March 11, 2013 12:04 am

Great and good flex banking muscles

george osborne leaves the treasury©Bloomberg

The Parliamentary Commission on Banking Standards has flexed its muscles more forcefully than George Osborne ever expected.

When the chancellor gave the commission power to scrutinise his banking reform bill, he did not forsee a rebellion by his fellow Conservative MPs, a former chancellor and even the archbishop of Canterbury.

In a report on Monday, the commission, chaired by Conservative MP Andrew Tyrie, objects to the proposed law’s requirement that a bank’s equity capital must exceed 3 per cent of its assets.

The commission, which includes Lord Lawson, former chancellor, and Justin Welby, archbishop of Canterbury, said it is “wholly unconvinced” that a 3 per cent leverage ratio is sufficient.

A leverage ratio is seen as a powerful backstop to more manipulable capital ratios, which depend on banks applying often-controversial “risk weights” to different categories of loans. That risk judgment, the focus of concern among regulators in the UK and internationally, is stripped out by leverage ratios.

The original Vickers review recommended a leverage ratio of at least 4 per cent.

Two of Britain’s banks, HSBC and Barclays, last week published their Basel III leverage ratios for the first time, although they will not be enforcable until 2018. Although HSBC exceeded 4 per cent, Barclays’ was only 2.8 per cent.

The commission’s initial report, published late last year, urged the government to “electrify” the Vickers proposal on ringfencing retail banking, by giving the regulator a reserve power to force full separation of a bank.

Its follow-up report welcomes the government’s endorsement of that idea but calls for further measures to police the ringfence and to ensure ringfenced entities are structured as empowered sister companies, not subsidiaries.

The commission’s adversarial stance is important because although Mr Osborne is set to win a comfortable majority for the banking reform bill on Monday, he will face a much tougher fight when the measure goes into the House of Lords.

Mr Tyrie’s willingness to assert parliamentary might over the Treasury was displayed last year when the Treasury committee, which he also chairs, forced ministerial concessions on Bank of England governance.

“The precedent has been set and it will happen again,” said a Conservative member of the banking commission.

“It will be a pretty formidable alliance when the first three speakers in the Lords on any amendment are a former Tory chancellor, a former Treasury committee chairman and the archbishop of Canterbury,” the Conservative said.

The commission’s second report is critical of the government’s timetable for passing legislation, accusing it of rushing through the parliamentary process before the commission’s final report on banking standards is due in May.

“It is highly regrettable that the government appears to be compressing the timetable and railroading the bill through committee stage,” the report concludes. “The task of sorting out the banking industry, of which this bill will form a major part, is absolutely essential for the long-term health of the British economy. Let’s get it right.”

The Law Society, which represents the legal profession in England and Wales, is also critical of the government’s bill. It warns that too much of the detail of the rules has been left for secondary legislation, extending the uncertainty surrounding the new regime. In addition, it points to unnecessary complexity in the ringfencing rules and to loopholes for EU banks to “passport” retail banking services into the UK without using ringfence structures.

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