Wed, Sep 18, 2013 - Page 9 News List

Banking practices changed little since crash

When Lehman Brothers went bust, images of staff carrying boxes out of offices in New York, London and Tokyo seemed to represent an unforgettable public humiliation for bankers. Action was taken to shore up the system, but key figures at the heart of the financial rescue in 2008 reveal that the risk of another meltdown is still very real

By Larry Elliott and Jill Treanor  /  The Observer

The regulatory system discredited by the crisis has also been overhauled: the Financial Services Authority watchdog was shut down and replaced with a new Prudential Regulation Authority inside the Bank of England and a Financial Conduct Authority in the former offices of the City regulator.

However, this is not enough for some. Myners sees the regulatory changes as largely cosmetic. He said he never believed the regulatory architecture was to blame for the banking crisis and adds that these changes are “quite modest.”

Modest they may be, but they are causing confusion. The debate about the structure of the banking industry and the amount of capital banks should hold is still raging.

The British government is still trying to decide whether RBS — bailed out with £45 billion (US$71.6 billion) of taxpayers’ money in 2008 and 2009 — should be broken up. And there’s still no clear answer on how much capital banks should be required to hold, although a level was set in an international agreement known as the Third Basel Accord (Basel III), hammered out in Switzerland and scheduled to be introduced from this year.

Turner, who has in the past said that banks’ capital ratio should be higher (Basel is aiming at a minimum 7 percent by 2019; more for big firms), now thinks former Bank of England governor Lord Mervyn King was correct in his obsession with this issue. “[King] was always a capital hawk, saying banks needed a lot more capital,” Turner said. “In retrospect, he was right... If I was a benevolent dictator of a greenfield global economy, free to make decisions without worrying about either international negotiations or transition difficulties, I would go for much higher capital ratios even than Basel III.”

Sir John Vickers, who led the coalition government’s review into the future of banking and came up with the idea of ring fencing, last week called for capital ratios of 20 percent — four times the amount of capital RBS was holding when it nearly collapsed and more than double that required under international rules.

Debate is still raging about how to measure that capital. The focus has shifted from a straightforward capital ratio — which allows banks to use their own models to measure the risks they run — to a leverage ratio, where banks are not allowed to make judgments about whether some assets are riskier than others. At the moment, that ratio is set at 3 percent.

The debate has blown up a into row between the regulators and the banks, the latter arguing that being forced to hold more capital means they lend less to businesses and households. Using the leverage ratio has forced Barclays into a £5.8 billion cash call — the prospectus for which is due this week. This sum is less than the bank needed to find to escape a government bailout in 2008, but is still one of the largest ever by a UK bank.

Myners and others, however, reckon that even this leverage requirement is too low. “A 3 percent leverage ratio is still very thin, yet the banks have been able to convince the media that it will cause them to reduce their lending [if it is any higher],” Myners said. He reckons that a mere 3 percent capital requirement (which enables a bank to lend more than 30 times as much as the capital it holds) is “simply planning for failure.”

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