How does the UK bank report compare globally?

LONDON Mon Apr 11, 2011 7:14am EDT

LONDON (Reuters) - Britain's Independent Commission on Banking published its preliminary report on Monday which recommends shielding depositors from riskier banking activities.

This objective is shared by regulators across the world but divergences are emerging over how to achieve this. The following compares the ICB's report with what's happening elsewhere. Banks look to exploit any differences in regulation to cut costs.

UK PLAN MIRRORS U.S. LAW?

Up to a point.

The UK panel's preliminary recommendations deal with the same issues as the sweeping reform of Wall Street approved last year and known as the Dodd-Frank Act.

The Volcker rule is a section within that legislation which prevents any deposit-taking bank from proprietary trading or effectively taking market bets with their own money.

Volcker also limits a deposit-taking bank from being too involved in a hedge fund, private equity and derivatives trading, and caps the growth of the biggest banks.

The UK report shies away from any such caps or requirements for structural changes. It allows banks to keep their overall size and operations -- but at the cost of holding more capital.

The UK's ICB panel believes it can replicate U.S. legislation by recommending banks construct internal "firewalls" of capital to ringfence deposit-taking activities.

The ICB says risky activities involving hedge funds would be conducted by a bank's non-deposit taking operations in any case.

Proprietary trading in Britain's banks is relatively small, and the ICB said a rule similar to Volcker would have no significant effect. It conceded that, unlike Volcker, its report does not tackle conflicts of interest between a bank's own trading activities and those it conducts on behalf of clients.

Lawyers say the United States already had a head start without Volcker as previous legislation had required some ring-fencing of deposit operations.

Its new Dodd-Frank Act is on balance tougher by having a direct impact on business models rather than indirectly via capital requirements.

EUROPEAN UNION

No threat to the big banks.

The EU's executive European Commission is drafting a law to introduce new global bank rules known as Basel III but there is no sign that ring fencing of deposit-taking operations is foreseen.

France and Germany have made it clear they have no intention of forcing their so-called universal banks -- which have retail and investment banking under one roof -- to change their structures.

Attempts by the United States to seek support for a wider Volcker Rule have been rebuffed.

UK VS "SWISS FINISH"

The Alpine state is well ahead.

Switzerland also has a banking sector that is many times the size of its economy and is taking a tough line on banks.

Regulators there have detailed a "Swiss finish" or the extra capital requirements its biggest banks will have to hold above globally agreed Basel III minimum of 7 percent that all banks must have from 2013.

Switzerland is proposing that UBS and Credit Suisse hold an equity Tier 1 capital ratio of at least 10 percent, with a further 9 percent, which could be in the form of contingent convertible bonds or CoCos.

This lifts the total to 19 percent by the end of 2018, well ahead of the 10 percent total recommended by the UK's ICB.

The Swiss regulator is also proposing changes to a bank's structure to make sure that functions such as payments continue in the case of a bank failure, an aspect the ICB also stresses.

GLOBAL SAFETY WATCH

The issue of contingent convertible bonds will be key.

The Financial Stability Board has been asked by the world's leading 20 economies (G20) to agree extra safeguards on the world's systemically important financial institutions (SIFIs) which would include HSBC and Barclays.

It is expected to recommend an extra capital buffer of around 3 percent on top of the Basel III minimum, taking the total to about 10 percent -- in line with the ICB's recommendation.

The ICB says the highest-quality form of capital buffer would consist of pure equity which absorbs losses well.

This is unlikely to be backed globally.

Instead, the FSB package will include options to create a buffer using CoCos like the Swiss plan.

The ICB gave a lukewarm endorsement to CoCos, saying questions remain unanswered, such as who would buy them.

The ICB says UK banks' wholesale and investment operations should not be required to have more equity than that agreed at an international level -- though the Financial Services Authority appears to have a different view.

Regardless of what international consensus is reached, the ICB says large retail banking operations in the UK should have an equity ratio of at least 10 percent.