LONDON (Reuters) - Britain’s plan to safeguard retail banking is a far better idea than the U.S. approach of forcing banks to hive off speculative trading, the Bank of England’s next governor told lawmakers.
Mark Carney is to take up the reins in July, three months after the central bank becomes Britain’s main regulator for lenders.
In the wake of the financial crisis, regulators are introducing measures to shield the deposit-taking business of big banks from high-risk practices, reducing the prospect of a big failure that could destabilize markets and force a government bailout.
The United States is implementing a reform known as the Volcker Rule to ban proprietary trading, in which banks take speculative bets on the market with depositors’ money.
Britain’s government this week said it would implement the so-called Vickers reform, which requires separate, extra capital for the deposit-taking arms of banks, by 2019.
“No, I don’t think you should overlay a Volcker Rule on the Vickers recommendations. The ring-fence model is the superior model,” Carney told a UK parliament treasury select committee hearing into his appointment.
“It’s extremely difficult to draw the line between market-making and proprietary trading ... It would unnecessarily divert the supervisors’ attention from ensuring the ring fence is respected,” Carney added.
The government has also agreed that regulators can break up banks if the so-called ring-fence proves leaky, a move Carney said he would support on an “institution by institution basis”.
The Bank of England and its Financial Policy Committee will have powers to force banks to top up their capital buffers above minimum requirements.
The current governor, Mervyn King, has been among the hawks calling for much tougher supervision of banks after Britain had to rescue RBS and Lloyds, two of the country’s “big four” lenders.
In his hearing, Carney, a former Goldman Sachs banker, signaled he would largely continue with the hawkish tone set by King after two banks, RBS and Barclays, have been fined for rigging the Libor interest rate benchmark.
Even though the new Financial Conduct Authority will look to tackle market abuse, Carney said what he described as “shocking scandals” would also affect how the central bank supervises lenders.
“This type of behavior, even at a much less serious level, has consequences for prudential supervision, for capital, for activities, for compensation,” Carney said.
Some UK lawmakers want Britain to impose a much stricter cap on bank balance sheet size, known as a leverage ratio, than that agreed at the global level.
The ratio would measure a bank’s total assets, not just risk-weighted assets, against its equity, and any breach above a certain level would draw the regulator’s focus.
The cap would become the main regulatory brake on risk.
Andrew Haldane, the Bank of England’s director of financial stability, said the system of working out capital requirements is too complex, relying on a bank’s own questionable arithmetic, and that simpler rules such as a leverage ratio would be safer.
Carney took a more moderate stance, saying the ratio should be a backstop to calculating capital buffers, reiterating the policy of the G20’s Financial Stability Board, which he chairs.
But there is a need to keep a close eye on what are deemed to be low-risk assets at banks to make sure enough capital is being held against them, he said.
The BoE should not be directing bank activities towards specified sectors or regions, given that the government has policy levers for that, he added.
Britain, with the United States, is leading the way in devising mechanisms to close big banks that get into trouble without taxpayer help, but there is more work to be done, Carney said.
editing by Jane Baird