Bankers warn MPs that “New Controls” could create more “Risk” in the Financial System
Sector: Banking & Finance
9th June 2011
Britain's most senior bankers have warned that plans to protect UK savers' money in the event of a future crisis could expose the financial system to greater risk.Bob Diamond, chief executive of Barclays, said the Government-appointed Independent Commission on Banking's (ICB) plans to ring-fence retail banking could make an implicit state guarantee for banks "explicit". Stephen Hester, chief executive of Royal Bank of Scotland, said such ring-fencing could introduce "moral hazard" and increase the cost to taxpayers if there were a new crisis. "There is a risk of moral hazard if you create a protected beast that the Government will support, while other parts of the banks are made more volatile as there is no way they would be supported," he said.
The bankers' comments came in evidence to the Treasury Select Committee, which also saw Douglas Flint, chairman of HSBC, and António Horta-Osório, chief executive of Lloyds Banking Group, give their views on the dangers to the UK financial system of some of the proposed changes. The ring-fencing idea was made in the ICB's interim report published in April where it suggested the UK retail banking businesses of large banks should be put into separate units that could be isolated from the rest of a bank in the event the lender got into trouble. In a submission to the Commission released yesterday, HSBC said the proposal risked causing "immense dislocation of funding markets for banks and UK corporates". Efforts to make banks safer have also involved writing so-called "living wills" that detail how a firm would be wound up in the event of its failure. Mr Diamond said Barclays could be a "test case" and would have a full resolution plan in place by the end of March on how it could safely be allowed to collapse in the event of what he described as an "accident". The banker added he was concerned at moves to force banks to hold larger buffers against losses. "I do worry that we are making capital levels too high," he said in a reference to plans to increase the core Tier 1 capital ratio of the Britain's biggest banks to 10pc, meaning that for every £10 they lend out they must hold £1 in reserve.
Banks are being pushed to issue contingent convertibles – or "CoCos" – that would convert into new shares should they get into trouble. Mr Diamond said Barclays was close to gaining approval to issue such a bond. The hearing was also told by Mr Hester that there could have been some "leakage" of taxpayer subsidies into banks' bonuses pools, as he answered questions on widely reported suspicions that state bail-outs supported City pay.
Source: Telegraph
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