Econintersect: Sir John Vickers, the Oxford University professor who chaired the UK Independent Commission on Banking in 2010, will reveal tomorrow his current view that the commission conclusions were too lax on capital requirements for banks. The commission made a recommendation that capital requirements for banks should be increased to at least 10%. The Financial Times reports tonight (08 September 2013) that Vickers will say in a speech tomorrow he now thinks the requirement should be 20%.
Other provisions of that report included recommendation of functionally separating depository and investment banking by a process called “ring-fencing” that would still permit common ownership of the two operations.
The following video from September 2011 shows Julian Skan, head of capital markets for U.K. and Ireland at Accenture Plc, and Jonathan Charley, partner at Bearingpoint Ltd., discuss the U.K.’s Independent Commission on Banking report.
Calculating bank capital using the risk weighted Tier 1 metric has come under some criticism because it is a something that can be manipulated by banks. The Financial Times points out that overall leverage (equity to total asets) is a metric gaining favor as a better indicator. The Basel III requirement is for a minimum of 3% equity (33 times leverage), although some countries (like the U.S. at 6%) are implementing higher requirements.
The Financial Times says Vickers believes the correct number should be 10% (10:1 leverage maximum). Alternatively he suggests that Tier 1 should be increased to at least 20%.
Sources:
- Vickers calls for doubling of bank capital levels (Patrick Jennings, Financial Times, 08 September 2013)
- Independent Commission on Banking (Wikipedia)
- The UK Independent Commission on Banking Report (Ernst & Young, 2011 September)
- Tier 1 Capital (Wikipedia)
- Basel III (Wikipedia)
