CRD 4 puts Vickers ring-fencing proposals in doubt

Author: | Published: 2 Aug 2011
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The UK and Europe may have a fight on their hands over retail ring-fencing in the wake of the release of the Capital Requirements Directive (CRD) 4.

While CRD 4 requires a minimum of 7% common equity for banks, the UK’s Vickers Independent Commission on Banking recommends a 10% minimum common equity for the ring-fenced retail banks in the UK.

"I think we may find the UK government having a little bit of a fight with Europe if the final Vickers Commission recommendations follow the interim report and are implemented by government," said Benedict James, a regulatory partner at Linklaters in London.

Jonathan Herbst of Norton Rose said the question remains whether the CRD 4 rules will slow down the Vickers process to respect the new European regulation, or go full-steam ahead while recognising that there will be problems.

"It’s one of the key questions, and I don’t think there’s an easy answer," said Herbst.

The FT put the question of the relationship between Vickers and CRD 4 to EC internal market commissioner Michel Barnier on June 21. Barnier responded that member states can always use the counter-cyclical buffers to impose higher levels than those in CRD 4.

But, says James, "it doesn't seem right to suggest that these mechanics, which are designed to take the heat out of cyclical credit sprees, should be used permanently to fill a gap between the EU mandated levels and what a member state would prefer."

The Financial Services Authority (FSA) and Bank of England have both made it clear they aren't happy about this, he said, and it is not impossible that the UK may somehow seek to impose higher levels than the Regulation mandates.

That would be an interesting legal position, said James. "But in practice, if you were a UK bank you’d be pretty brave to take the FSA or PRA [Prudential Regulatory Authority] to court for breach of EU law," he said. In addition, the Financial Stability Board has proposed that the newly designated global significantly important banks should hold up to 2.5 % more common equity than Basel III levels. This would take them up to 9.5%, which is only 0.5% less than the Vickers recommendations.

"It remains to be seen how the EU will implement this – perhaps through a CRD 5 - but if they do that should take most of the heat out of the argument," said James.

See also:

CRD 4 proves "Europeanisation" of regulation
Credit Agricole CIB: tier two now instrument of choice
Net stable funding ratio could have a "catastrophic impact" on credit