Despite the Vickers report’s publication confirming many aspects already published in the April interim report, it has also raised more questions.
IFLR spoke to lawyers today to find out the key points that remain unanswered. Here are a few:
1) Wholesale funding uncertainty
There is huge uncertainty around wholesale funding limits and how they should be applied. The Independent Commission on Banking (ICB) stops short of saying where the limit should be set.
On Page 61, paragraph 3.56, the report states:
A ring-fenced bank should be allowed to raise wholesale funding, but in addition to existing regulations backstop limits should be placed on the absolute level of wholesale funding permitted. A cap on the absolute level would act as a check against attempts to arbitrage more complex regulations.
This will be a key point of uncertainty for banks, and the ICB will be criticised for avoiding finalising the detail.
2) Has the ICB ever heard of CRD 4?
The Vickers report roundly ignores the existence of Europe’s Capital Requirements Directive 4 (CRD 4).
According to one lawyer: “This is a cack-handed request by the UK to Europe to say: ‘we understand you are trying to put together a single European framework, but would you mind if we set up an entirely separate one for our national banks?’”
Many are confused why the ICB has progressed so far without acknowledging that Europe, the Commission and the UK’s treaty obligations might have some bearing on what it proposes.
3) How will bail-in rules affect short-term debt?
The report states that all unsecured debt with a duration of more than 12 months should be subject to bail-in regimes from 2019. But what will this mean for investors?
Authorities should have a “primary bail-in power” to impose losses on creditors holding “the most readily loss-absorbing” liabilities if a bank is failing.
The report defines long-term senior unsecured debt as the most readily loss absorbing liability class, and argues that these bail-in bonds should have risk disclosure acknowledging this.
“With a cut off like 12 months, I would have thought this would mean investors might seek to structure debt with the least possible chance of immediate bail in,” said Peter Green, partner at Morrison & Foerster in London.
“So investors might look to fund banks with shorter-term debt, but it is early days to be sure how the proposals will impact the way banks fund themselves,” he added.
4) How will banks’ IT systems change?
Operability points such as IT systems are also concerning for banks. There is uncertainty surrounding whether banks will need two IT platforms, a change that would cost hundreds of millions of pounds to implement.
Barclays has been canvassing a system whereby one platform would be retained and used by both investment and retail arms. This would be defined by contractual agreements between the two banks, giving each of them access to the platform.
“If one arm went down, the contractual separation would ensure the other side could continue using the platform,” said one lawyer.
The report offers no guidance on this.
5) How far reaching are European Economic Area limits?
On page 52, paragraph 3.39, which discusses what ring-fenced banks will not be able to do, it states:
“As a result prohibited services should include (though need not be limited to): a) any service which is not provided to customers within the European Economic Area (EEA)
This statement would imply that the only service a large international bank will be able to provide to clients in the US, for instance, is a service it already provides in the EEA. “I’m not quite sure what they [the ICB] mean by that,” said Peter Snowdon, a partner at Norton Rose in London.