We had a busy day in the UK over the past two days with the release of the Parliamentary Commission Report, George Osborne’s speech about banks and the economy at the Mansion House and the announcement by the Prudential Regulatory Authority that there is a £27.1 billion capital shortfall in the UK banking system.
These announcements combine to show that we still have a fragile economy and financial system in the UK but, luckily, not as fragile as Cyprus or Spain.
The summary of these announcements is that banks cannot be too big to fail and bankers cannot be too big to jail.
Here’s a brief overview of each release.
The Parliamentary Commission Report
The Parliamentary Commission was launched by George Osborne last year, after the LIBOR crisis. Its objective: to find out why the culture of banking had become rotten and sort it out.
Eleven months and nine volumes of testimonies and reports later, the final 576 page report covers a wide range of topics from remuneration to governance, competition to the Royal Bank of Scotland.
The key highlights from this report are:
- A new Senior Persons Regime to ensure that the most important responsibilities within banks are assigned to specific, senior individuals who will be fully accountable for their decisions
- A new criminal offence for Senior Persons of reckless misconduct in the management of a bank, which would result in a jail term if found guilty
- Employees covered by the licensing regime should adhere to a new set of Banking Standards Rules, replacing the existing inadequate and confused statements of principle
- A full-time Chairman should be the norm. Under the Senior Persons Regime, bank Chairmen should have overall responsibility for leadership of the Board as well as for monitoring and assessing its effectiveness
- A non-executive board member – preferably the Chairman – should be given responsibility under the Senior Persons Regime for the effective operation of the firm’s whistleblowing regime
- The board member responsible for whistleblowing procedures should be held personally accountable for protecting whistleblowers against detrimental treatment and for satisfying the regulator that the firm acted appropriately in the event that any allegations of detrimental treatment are made
- The Chief Risk Officer, Head of Compliance and Head of Internal Audit should all have their independence protected, responsibility for which should lie with a named non-executive director
- The Commission is not convinced that a crude bonus cap is the right instrument for controlling pay, but has concluded that variable remuneration needs reform. Therefore, they recommend a new code to align risks taken and rewards received in remuneration with power for the regulator to cancel all outstanding deferred remuneration, including unvested pension rights,
- The Government should immediately commit to undertaking detailed analysis of a "good bank / bad bank" split of the Royal Bank of Scotland
George Osborne’s speech
George Osborne, the UK Chancellor, added to the debate during his speech at Mansion House, by talking about selling Lloyds Banking Group shares that are owned by the government (39% of the bank) to institutional investors early next year and, possibly later, to the general public as well.
With the Royal Bank of Scotland (RBS) there are more issues which need to be ironed out and so a sale to the private sector is unlikely before the next election in 2015. He also clarified that the debate about splitting RBS into a good and bad bank, as was done with Northern Rock, is now an active debate and one that should have been taken back in 2008 when the bank was bailed out (81% owned by the Government).
For a sale into private ownership the bank will need to meet three objectives: “if it would accelerate the path back to private ownership, deliver benefits for the wider economy and be in the interests of taxpayers.”
He also announced the departing Bank of England Governor, Mervyn King, has been given a life peerage for his public service.
Prudential Regulatory Authority (PRA) announcement
The PRA has concluded its study of the shortfall in capital at the UK banks, and finds that they are undercapitalised to the tune of £27.1 billion . That’s £2.1 billion more than originally announced, and includes an unexpected £1.5 billion shortfall at the Co-operative Bank, the subject of many recent headlines.
The report splits the undercapitalisation into two areas: the capital that is covered by existing plans amongst the banks, and the capital shortfall that is currencytl not covered by any plan.
These are figures that surprised me, as they breakdown like this:
UK bank capital shortfalls
Total Covered Exposure
RBS £13.6bn £10.4bn £3.2bn
Lloyds £8.6bn £1.6bn £7bn
Barclays £3bn £1,4bn £1.7bn
Co-op £1.5bn £0bn £1.5bn
N'wide £0.4bn £0.4bn £0bn
Total £27.1bn £13.7bn £13.4bn