UK banking overhaul continues

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