* Ring-fence plan falls "well short" of what is needed
* UK should add legislation to carry threat of bank
* Simple derivatives should be allowed within "ring-fence"
* UK bank shares dip, Barclays down 2.5 percent
By Steve Slater
LONDON, Dec 21 Britain needs to introduce
legislation that could break up banks if standards slip because
current reform proposals fall short of what is needed, an
influential panel of lawmakers said.
The Parliamentary Commission on Banking Standards also said
on Friday the government could set tougher rules for how much
leverage banks were allowed, adding that the committee itself
would consider whether to propose banning proprietary trading.
Britain, going further than most countries in pushing
through change, is forcing banks to separate, or "ring-fence",
their domestic retail arms from riskier investment banking.
"The proposals, as they stand, fall well short of what is
required. Over time, the ring-fence will be tested and
challenged by the banks," PCBS chairman Andrew Tyrie said.
"That is why we recommend electrification. The legislation
needs to set out a reserve power for separation; the regulator
needs to know he can use it."
The Treasury said finance minister George Osborne will
consider the proposals and respond when reforms are brought to
Parliament early next year.
Osborne appears unlikely to go as far as the PCBS wants. A
previous Commission, led by John Vickers, said a full break-up
of banks was not needed, and Osborne may decide that if the
ring-fence plan proved to be flawed, the Treasury could then
introduce fresh legislation to strengthen it.
Britain wants to prevent a repeat of the need for taxpayers
to bail out lenders, as happened in 2008 with a 65 billion pound
($106 billion) double rescue of Lloyds Banking Group
and Royal Bank of Scotland.
The PCBS, asked to assess government plans before their
introduction, said legislation should be introduced now because
banks had to be discouraged from gaming the new rules for the
ring-fence to succeed.
"All history tells us they will do this unless incentivised
not to," Tyrie said, adding politicians could be lobbied to put
holes in the ring-fence too.
"Additional powers are essential to provide adequate
incentives for the banks to comply not just with the rules of
the ring-fence, but also with their spirit," the Commission said
in its 146-page report.
Bank shares fell up to 2.5 percent, underperforming a 1.1
percent lower European bank index.
"I would be concerned ... that a future,
politically-motivated government or regulator could take
draconian action with impunity. It would be putting in place a
simple mechanism for banks to be picked on and to be broken up,"
Investec Securities analyst Ian Gordon said.
"One could argue that threat is there anyway and could be
implemented," he said, adding the PCBS had added to uncertainty
The threat of break-up would be most damaging to Barclays
- whose shares fell 2.5 percent - and to a lesser
degree to HSBC and RBS, analysts said.
In a concession to most banks, the PCBS said banks should be
allowed to sell simple derivatives within their ring-fenced
operation, which had been a point of contention.
"MORE NEEDS TO BE DONE"
The PCBS was set up after Barclays was fined for rigging
global interest rates and banks were slammed for a series of
Tyrie said the market rigging and corruption shown this week
at Swiss bank UBS "beggar belief. It is the clearest
illustration yet that a great deal more needs to be done to
restore standards in banking."
Among plans to rein in risk-taking is a cap on leverage,
which Britain plans to set at 33 times banks' capital - weaker
than an original proposal for a maximum of 25 times.
The PCBS said it was "not persuaded by the government's
relaxation" of that leverage rule, adding the future regulator,
the Financial Policy Committee, should set the leverage cap.
Tyrie said it may also be appropriate for Britain to block
banks from any proprietary trading - known as the Volcker Rule
in the United States - and the PCBS will take evidence on that
early next year.
The cross-party commission, which includes Justin Welby, the
next Archbishop of Canterbury - the Church of England's most
senior bishop - has spent the past three months deliberating the
reform plans, taking evidence from the bosses of major banks as
well as regulators, politicians and central bankers.
It said it was concerned too many reforms will be left to
the discretion of the future regulator, and said the power to
force bondholders to take losses when a bank hits trouble should
be included in primary legislation.