LONDON | Chancellor of the British Treasury George Osborne confirmed Monday afternoon what Vince Cable, the Business Secretary, had announce the day before on BBC’s Andrew Marr Show: that the Vickers report will be forced on to all banking institutions in the United Kingdom.
“Our big banks were at the very centre of the financial crisis, what the Europeans call Anglo-Saxon financial capitalism. It needs reform.”
The next weeks will be spent in finding out how fully this shift will be geared by 2019, but the reform package recommended by the Independent Commission on Banking (ICB), chaired by John Vickers, calls for the UK’s largest retail bank operations to be ring-fenced from investment banking and to implement stricter capital and leverage ratios. The ICB also recommends that bank debt should be capable of absorbing losses on failure, and that bondholders should be earlier in the queue of those taking pain.
Talking to the House of Commons, chancellor Osborne committed the coalition government to implement the report’s all main principles and acknowledged that while the ring-fence is not an absolute solution, it will protect taxpayers’ interests, though.
Radical is the word, Santander UK CEO Ana Botín told the House of Lords Economic Affairs Committee back in October.
“First, on the reforms proposed by the ICB, we consider those to be very radical and major reforms for the financial system in the UK. Even a bank such as Santander UK, which is as pure as you can get in terms of retail and commercial banking, will be affected.”
Implicitly, or sorts of, Ms Botín made clear that the Spanish giant considers the British coalition government must listen to the most important EU retail bank when putting in practice the Vickers conclusions.
“Santander has invested £15.5 billion in this country, and we are here to stay. We are a long-term investor, but the returns that we will be giving over the next couple of years will be very significantly lower than before. We are ok with that as long as we are investing in the long-term success of this economy. So we are, and want to be, very much involved in how the specifics of this report turn out and how they turn out for our customers.”
Ms Botín suggested that in Santander UK’s opinion, the main crack on the whole reform plan is the excessive capital buffer the authorities will require. A 10pc of top quality domestic assets as shares and retained earnings, and 17pc-20pc to absorb losses on the highest quality assets plus bonds easily convertible to equity for the largest financial entities, will translate into further costs.
“We believe that the costs to our customers and to the economy in terms of growth will be significant […] There is, potentially, also an effect on how we manage our own risks and balance sheet as a retail, ring-fenced bank.
“At some level adding more capital does not make a difference to safety and soundness, but it does make a difference to available liquidity.”
Will retail banking and its customers be unfairly punished for others’ faults, then? Ms Botín recommended that the actual functioning of the new regulation should be ‘flexible’, so to speak, not to impede non-investment banks to maintain activities that imply certain border-line transactions while upgrading precautions to the risks involved in investment banking.
“Fundamentally, better governance and proper supervision is what really will make the system safer. The question is whether the proposals in the report would have made a difference to the crisis. In our case at least, they would not have made any difference.
“Depending on how the flexibility is interpreted in the report, there are certain services we might not be able to provide: for example, interest rate or foreign exchange services. There are companies with £1 million in sales that are exporting to China. If you want to do what we call international confirming, we have to assume some kind of tiny risk.
“We believe that these are essential services and activities for us as a retail commercial bank, being able to serve all our business customers with a range of products that are not exotic and not even global, but are related to exports and customers’ activities. This increasingly is of interest to very small companies because today’s world is global.”
Also, retail commercial banks have heavy balance sheets and in order to offer fixed-rate mortgages, for example, they need to be able to hedge that risk.
“We have risks like the Libor base rate risk, which sometimes we need to hedge with derivatives and other financial instruments. Again, the flexibility introduced by the ancillary activities concept of the report is very important.
“There is scope within the report to make it more flexible so that there are different banking business models, including our own, which is probably the purest one that can be successful, again, because we depend on our customers. But ultimately the fact that the non ring-fenced business could be such a small piece that there would be a question for us whether we would continue offering these services or not.”
For Santander UK, the battle to make itself heard has just begun.