* UK watchdog to further refine bank capital guidelines
* Bankers say regulatory messages are mixed
* Tucker wants fixed basic capital requirements as backstop
* Tucker says bankers could be partly paid in bank debt
By Huw Jones and David Milliken
LONDON, Oct 17 The worst may be yet to come for
Britain's banks as they are still not strong enough to cope with
another financial meltdown, a top regulator warned the country's
bankers on Wednesday.
"We are in very difficult circumstances in the sense that
huge risks are behind us (but) there is still a tangible
probability - not a high probability - that the worst may still
be ahead," said Paul Tucker, deputy governor of the Bank of
"Basel I, II, III, IV and V are not calibrated for the kind
of end of the world risks that lie within the realms of the
possible at the moment," he told the British Bankers'
Association's annual conference in London on Wednesday.
British banks have already been forced to build up large
capital defences since the beginning of the financial crisis in
2007, and are caught between regulators' conflicting advice to
trim surplus reserves while acquiring more capital.
In September, the Bank of England's Financial Policy
Committee said banks could trim reserves if they lent to
businesses but that they should also build up core defences, by
cutting bonuses if need be.
Tucker also warned of a huge public backlash if banks - such
as Royal Bank of Scotland and Lloyds which were
rescued by taxpayers in 2008 - needed to be bailed out again.
Although British banks' reserves are now above the minimum
international standards known as Basel III that are being phased
in from January, Tucker - the top contender to succeed Mervyn
King as BoE governor next year - said banks should go further.
"If we get a tidal wave, we may all be grateful that there
are a few billion more in capital here and there in the banking
industry, keeping banks in the private sector rather than the
dead hand of state ownership," he said.
But Andrew Bailey, head of banking supervision at the
Financial Services Authority, said the BoE's Financial Policy
Committee (FPC) was struggling to send a clear message to banks
on how big capital defences needed to be.
The FPC needed to fill in "what for me is the big gap at
present, namely how we explain and calibrate the resilience
objective in terms of capital," Bailey said.
Tucker added it was not "safe" to continue allowing banks to
calculate their own capital buffers using in-house computer
models, and called on global regulators to consider mandatory
fixed amounts of capital instead as in the United States.
He also backed forcing top bankers to have some of their
bonus in the form of their bank's debt, meaning they would bear
losses to help with any bailout of the bank.
Bailey said the FSA still required banks to build up their
core Tier 1 ratios - a benchmark of a bank's health - in line
with Basel III, but would allow them to scale back the capital
they hold above the regulatory minimum, know as Pillar 2.
Since 2008, this Pillar 2 capital has risen from just under
20 billion pounds ($33 billion) to 150 billion pounds.
Regulators are trying to restore trust in banks already
battered by mis-selling scandals, tougher rules and the record
$450 million fine for Barclays in June for trying to
manipulate the London Interbank Offered Rate (Libor).
The government said on Wednesday it would change the law to
make the rigging of market benchmarks illegal and strip the BBA
of its role as Libor administrator.
BBA Chief Executive Anthony Browne said a survey showed only
28 percent of the public trusted high street banks.
"If there is one good thing to come out of Libor, it is that
there is now clear determination from the top of the industry
that they must do whatever it takes for banks to win back their
place in society," he said.
Bankers recognise that the "good cop, bad cop" message from
regulators was partly down to the FPC's dual supervisory role of
monitoring economic growth as well as maintaining financial
stability, two remits that often contradict each other.
"It shows that supervision is an art and not a science,"
said Paul Chisnall, executive director of the BBA. "The process
of supervision is evolving. There is a new dynamic between the
overall level of capital in the financial system and the ability
to adapt this to give some assistance to help the economy."
However Rolls Royce Finance Director Mark Morris said
regulators had not yet got the balance right for business. "We
feel (it) is being overlooked more in favour of regulation
rather than growth," he told the BBA event.