Banking StandardsWritten evidence from Anthony Browne, Chief Executive, British Bankers’ Association

14 January Evidence Session

By my reckoning there were two points which arose during my 14th January evidence session upon which I undertook to follow-up in writing: the BBA’s position on the Commission’s first report following its pre-legislative scrutiny of the draft Banking Reform Bill and a specific issue on LIBOR.

Draft Banking Reform Bill

The first concerned the BBA’s response to the Commission’s report following its pre-legislative scrutiny of the draft Banking Reform Bill. This resulted from confusion between an article written prior to the release of the report expressing concern within the banking industry over the prospect of a full Glass-Steagall division of retail and investment banking of a type rejected by both the US and the European Union, since neither the Volcker rule nor the Liikanen report involve this. While the Volcker rule prohibits proprietary trading, this is clearly much more limited than a complete separation of investment banking; Liikanen, on the other hand, adopts an approach more akin to Vickers, though proposes the ring-fencing of activity to be excluded from the retail banking part of a banking group.

We issued the attached Press Release on the day of the report outlining that we broadly viewed its publication as a step forward. As you can see, it starts by saying in unambiguous terms that:

“We welcome this report which broadly endorses the Government’s approach to banking reform. The industry is strongly committed to taking the necessary steps to ensure that taxpayers are never again asked to bail out failing banks.”

We also said that the report:

“…shows that the Commission has thought very fully about many of the key issues arising out of the ICB’s recommendations and not just the immediate ones arising from the from the draft primary legislation”.

Within this context we then listed what we saw as some of the key issues, including the potential effect of imposing a more constraining leverage ratio than that set out by the Basel Committee and the importance of the limitations and safeguards relating to the ‘electrification’ of the ring-fence.

More generally, and we can send you copies, it can be seen from submissions to the Treasury Committee back in 2011 and our responses to the Government consultations—and indeed your pre-legislative scrutiny exercise—that, from the time that the Government announced that it supported the Vickers’ recommendations, we have focused our efforts on trying to help get the technical detail right. This is about ensuring that there is minimum disruption to customers and ensuring that the statutory provisions work. To give two examples: we have explained in various submissions that the position on ring-fenced banks being able to provide trade finance in support of exporters appears in conflict with the geographical limitations; and we have set out concerns relating to the proposed reliance upon Part VII FSMA transfer powers to reassign bank accounts and contracts to the new legal entities. This is purely about making sure that the legislation works as well as it can.

LIBOR

Turning to LIBOR, Lord McFall asked whether the BBA had placed any legal impediment upon my predecessor, Angela Knight, from commenting publicly. The position here is that the BBA places all employees under a confidentiality obligation. This is common in commercial organisations and is not unlike the obligation placed upon civil servants and other public sector employees. It does not preclude commenting publicly, but involves ensuring that the right director is fielded and that the BBA has an overview of what is being said on industry issues on behalf of its members.

The circumstances in which ex-employees would be expected to comment on issues from the perspective of their time at the BBA is quite limited and may even be said to be non-existent other than in the case of the current Parliamentary inquiry. I would say that the BBA’s general expectations on confidentiality would not usually place limitations on what can be said to Parliament.

LIBOR is however an exception since there are criminal and regulatory enforcement actions taking place not only in the UK but in other jurisdictions around the World. This does not prevent any information being provided in support of Parliamentary interest, but it did mean that the BBA, for instance, in providing evidence to the Treasury Committee (and this is available to the Parliamentary Commission) took great care to ensure that the information put into the public domain did not unknowingly prejudice any of these on-going actions. This is a point that was underlined for the handful of BBA employees with access to information concerning LIBOR upon the public announcement of regulatory investigation, which preceded my joining the BBA.

APPENDIX

BBA response to PCBS report 21/12/2012

Tighter leverage ratios could increase mortgage costs for British families

Commenting on the Parliamentary Commission on Banking Standards’ First report, British Bankers’ Association Chief Executive, Anthony Browne said:

“We welcome this report which broadly endorses the Government’s approach to banking reform. The industry is strongly committed to taking the necessary steps to ensure that taxpayers are never again asked to bail out failing banks.

“We welcome the Commission’s recognition that the banking industry needs time to prepare for the huge structural changes that creating a ring fence would require. While it is clearly important to retain a degree of flexibility around the scope of the ring fence it is equally critical that any new system creates regulatory certainty for banks and their investors. Too much uncertainty will deter investment and could hurt London’s position as the world’s leading financial centre. We will work with parliamentarians to try and achieve the right balance.

“We continue to believe the Government is correct to seek to align the leverage ratio requirements with international standards. The Commission’s support for a tighter leverage ratio that would come into force several years earlier than the rest of the world could cause real problems. Increasing the leverage ratio would restrict the number of mortgages banks could agree to and ultimately lead to more expensive mortgages for British families.”

Notes to Editors

PCBS First Report: 21st December 2012–12–20

General

Report shows Commission has thought very fully about many of the key issues arising from the ICB’s recommendations and not just the immediate ones arising from the draft primary legislation.

Overall they support the Government’s proposed approach but wish to see disciplines built in to ensure the integrity of the ring-fencing arrangements.

They also rightly wish to see greater assurance about Parliamentary scrutiny of both the primary legislation and the accompanying secondary legislation which will to a large degree give definition to the ring fence and recommend eg that a small ad hoc committee of both Houses be established in support of the affirmative procedure for the secondary legislation.

They recommend the inclusion is FSMA of a legal duty on directors to preserve the integrity of the ring fence. (Paragraph 222)

The de minimis exemption is supported. (Paragraph 200)

They do not question the 2019 deadline for full implementation of the ring-fence but consider the extended timeline to necessitate a high degree of transparency during the implementation phase. (Paragraph 125) 

Held over until next year

They have related that they plan to give further thought on some key issues:

Whether ring-fencing should be augmented by an equivalent to the Volcker rule. (Paragraph 96)

Whether further measures are needed in respect of large systemic banks and investment banks. (para 104)

Whether the ‘continuity’ objective is sufficiently defined. (Paragraph 130)

The provision of ‘simple’ derivative products by the ring-fenced bank is supported on the proviso that these are defined in the primary legislation. (Paragraph 194)

They recognise concerns expressed about trade finance and the ability to support exporters and therefore recommend that the Treasury undertakes a full separate consultation exercise on this next year. (Paragraph 209) [This has been a key concern for the industry]

Headline issues

The Commission proposes that the ring-fence be ‘electrified’ by which they mean that there should be reserve powers to enable the regulator to demand full separation of an individual banking groups if there was a risk that the objectives for the ring-fence would not be met and that there be a general reserve power enabling full separation across the sector if need be. (paragraph 165); it is recognised however that a recommendation of this significance ‘will require a number of limitations and safeguards including an independent review of ring-fencing effectiveness (paragraph 171) [This process will be critical and if such powers are to exist it will be important that such reviews are technical and not political in nature]

They recommend that regulators be given power to require a holding company structure and expect this power to be exercised. (Paragraph 228)

They recommend that the Treasury and the Bank of England establish a joint group to prepare and publish a full report on the implications for resolution of depositor preference and the scope and extent of deposit insurance including the feasibility of a voluntary scheme for deposits over £85,000. (Paragraph 279)

They recommend that the leverage ratio be set substantially higher than the minimum 3% required under Basel III but acknowledge that this would pose particular problems for some building societies. (Paragraph 259) [A concern the BBA would have would be if this constrained prime mortgage lending]

23 January 2013

Prepared 19th June 2013