To: The Right Honorable Chancellor of the Exchequer
From: Athinarayanan Sanjeevraja
Date: September 27, 2011
RE: Britain Banking Sector Reform
Suggestion:
Good Morning Chancellor. I just read the fine print of Sir John Vickers report. He suggests structural separation of the country’s banks into two parts retail and commercial banks bits. The principle of separating retail and commercial banking is sound. Indeed legal separation improver safety of retail banks. The entire separation might provide the strongest firewall to protect retail banking services from contagion effects of external shocks. I would like to suggest interbank lending should be strictly controlled in terms of proportion of total assets to avoid the type of contagion. The commission also said that tougher regulation makes British bank less competitive. So the commission recommends higher standards only for the bits of the banking system that are rooted in the domestic market. The commission does not really go very far towards addressing the issue of increasing competition. In my view the intelligent answer would have been moderate regulation right now and slowly becoming stronger in the near future because UK consumer and business confidence is plunging and PMI surveys reporting much weaker trends for activity and orders. UK Businesses are not getting the operational financing they need.
Yes, the degree of ring fencing is required. So the commission recommends all retail and small businesses deposits and their overdrafts will be ring-fenced while outside the ring-fence will sit activities such as investing and trading in securities and derivatives as well as debt and equity writing. The commission has provided about which activities must be in the ring-fence and which are prohibited from it. It is fine but ring-fencing does not deal with all the elements of systemic risk inherent in banking. Because the use of arbitrary risk weights based on perceived risk of default. This is not only render the UK bank purposeless but they are also prime cause of what is now rotten in them, for instance, the excessive exposure to what ex-ante was perceived as not risky. It is a million dollar question, why should banks be allowed to leverage their capital more when earning their risk adjusted interest rates from what ex-ante is perceived as the not risky as when earning those from the risky.
The commission also recommends that banks carry higher levels of capital to guard against future losses. The current structure of UK banks, markets assume that the government will rescue any troubled bank to ensure that retail depositors don’t lose their money. The commission launches the new structure of UK banks are likely to assume that any troubled investment bank will be allowed to fail or any rescue would have to come from investors. This would be likely to increase the funding cost of investment banks. The market is also building additional risk into the interest rates charged to the banks. However, it could also be argued that the funding cost of retail banks by adopting these recommendations. The commission failed to address that they will not be allowed any banks to fail under the structure proposed by Sir John Vickers. In my view that the higher loan rate may not be good social cost because it reduces excessive lending. In addition more sophisticated regulation and restriction leads to heavily skewed to the downside of the UK economy.
Let me conclude it Chancellor, sound bank governance and regulation policy effectively ring-fenced deposits will help to ensure sustainable and profitable UK banking sector but also strengthen UK economic growth. The commission failed to address that UK bank’s key economic role is the credit in UK economy is not even mentioned once in the entire 358 pages report. I would like to see Britain’s once again enhance its global reputation for responsible and prudent banking regulation.
Thank you very much for your kind attention to these issues Mr. Chancellor.
Sincerely,
Athinarayanan Sanjeevraja.
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