Sir John Vickers Suggests Doubling Capital Level For Banks

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Sir John Vickers Suggests Doubling Capital Level For Banks

Sir John Vickers said that the capital level for banks that was set two years ago by a government appointed commission  led by him should be twice that originally recommended. It is expected that on Monday, Sir John, who was the chief architect of Britain’s post-crisis regulatory reforms, will deliver his idea at the Regulatory Policy Institute to mark the anniversary of the collapse of Lehman Brothers when the financial crisis was at its worst five years ago.

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Sir John Vickers Suggests Doubling Capital Level For Banks

Earlier recommendations from ICB, led by Vickers

Sir Vickers, head of the Independent Commission on Banking (ICB), said in an interview the Financial Times that in a “blue-skies” world, banks’ core tier-one capital ratio, which is 10 percent at present should be 20 percent.  The 10 percent has already been accepted on the recommendation of ICB and is used for U.K. banks.

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The ICB also recommended that the high street operation of broader “universal banks” should be “ring-fenced” from perilous investment banking activities.

Banks in the United Kingdom are already following the 10 percent capital ratio. Banks that are under the supervision of  the Prudential Regulation authority already follow capital levels that are thrice the levels at the time of crisis in 2008.

Leverage of 33x not sensible

However, Sir John Vickers believes that the capital levels should be maintained at a higher level once the situation, which he called as “the skies are cloudy”, are over to maintain solid levels of capital in the banks.

The approaching Basel III global norms stipulate a 3 percentage leverage ratio, which at times is expressed as a leverage multiple of 33 times, should be maintained by the banks.

“It is not very sensible to run a market economy on the basis of a banking system that is 33 times leveraged, let alone 40 or 50 times leveraged,” Sir John told the Financial Times. Further, he says that the perfect level should be 10 times, which is equivalent to a 10 percent ratio.

According to Sir John, the ‘ringfence’ idea, which has not yet been implemented anywhere else in the world, is a crucial step to reducing bank dangers to taxpayers. While talking to the Financial Times, Sir John said that the crisis took a heavy toll on the banks due to the unstructured nature of the universal banks.

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Aman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at amanjain@valuewalk.com
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