UK BANKS will be forced to boost their capital and separate their core operations from riskier trading and investment banking at an annual cost of up to £7 billion, under sweeping reforms announced yesterday.

The final recommendations of the Independent Commission on Banking, chaired by Sir John Vickers, call for a bank’s ringfenced operation to have its own board of directors and equity capital equivalent to 10 per cent of risk-weighted assets.

But in concessions, the banks will be able to chose which non-core businesses to place inside the ringfence, with a deadline of 2019 to implement some of the toughest measures in the world.

The recommendations come after a year-long investigation into the near-collapse of the UK banking system in 2008. They punctuate a remarkable turnround for a financial centre that once boasted of its “light touch” approach to regulation.

The Vickers report also said that banks must maintain additional loss-absorbing capital, such as so-called bail-in bonds or contingent convertible bonds known as “cocos” over and above their equity, equal to a further 7 per cent to 10 per cent of assets adjusted for risk.

That rule puts the UK on a par with Switzerland, which also has an outsized banking sector. Both countries are seeking to avoid the problems of ­Iceland and Ireland, where financial industry woes devastated the broader economy.

Sir John said the reforms would be “fundamental and far-reaching” and that they would have helped prevent the high-profile failure of banks such as Northern Rock and Royal Bank of Scotland.

“Measures of this kind will do a lot to contain the damage, as well as to reduce the risks in the first place,’’ he said, adding that the reforms would bring UK banking “back to where it used to be”.

The CBI employers’ organisation warned that the proposals risked leaving UK banks at a “disadvantage to their overseas competitors”.

“The proposals on capital requirements are out of step with internationally agreed measures under way so will increase the cost of lending for UK businesses,” it said. Bank stocks trimmed early heavy losses in London and outperformed rivals in Europe as investors reacted to the report.

The additional costs – which the commission estimated at £4 billion-£7 billion – will result from wholesale lenders charging banks more to fund operations outside the ringfence, which will lose a government guarantee and the perceived safety of diversification. – (Copyright The Financial Times Limited 2011)

UK commission goes where other regulators fear to tread

ANALYSIS:THE INDEPENDENT Commission on Banking's plan to boost minimum equity and overall capital requirements for British banks would put the UK among the world's toughest regimes, and the proposal to ringfence retail banking is unmatched in large financial centres.

However, banks in other countries may eventually find themselves having to make similar, although less drastic changes in their legal structures, as part of the global plan to force financial institutions to write recovery and resolution plans, also known as living wills, lawyers said.

The commission, led by Sir John Vickers, wants banks to put their core businesses – including retail banking and small business lending – into a separate entity with its own board of directors and its own equity capital equal to 10 per cent of assets, adjusted for risk.

That capital level is well above the global minimum of 7 per cent set by the Basel Committee on Banking Supervision and puts the UK up with Switzerland and some Asian countries for overall capital requirements. Most other EU regulators plan to stick with the Basel minimums. There is even less support for formal ringfencing. Asian and US regulators dismissed the idea.

“In the emerging world . . . there will still be a desire to grow their financial sectors ... Hence erecting barriers to asset transformation or increasing the costs of intermediation . . . is unlikely to be seen as an attractive option,” said Richard Reid, research director of the International Centre for Financial Regulation.

Many continental European regulators point to the relative resilience of some universal banks during the 2008 banking crisis as evidence that the commission has fundamentally misdiagnosed the problem. They worry that higher capital levels could hit the real economy, single-country solutions could harm the common market and that free flowing liquidity and capital are critical to keeping the banking sector healthy.

“We should do everything to avoid what is detrimental to the single financial market. Not only would this cause higher costs for consumers, but it would also reduce the stability and resilience of the European banking sector,” Josef Ackermann, Deutsche Bank’s chief executive, has said.

The draft of the EU law that will set minimum capital requirements for the 27-nation bloc has been seen by some as preventing the UK from enacting Vickers’s 10 per cent minimum rule.

“The UK has gone out on a limb . . . Other countries are likely to fear the damage such a move could cause their banks, the economy and, ultimately, the taxpayers who funded the bailouts,” said Peter Green, partner at global law firm Morrison Foerster.

But Michel Barnier, the EU internal market commissioner, has pledged to give the UK enough “flexibility” to implement the Vickers recommendations. – (Copyright The Financial Times Limited 2011)