Cash-buffer rules for banks are still too risky, say MPs

The amount of cash banks have to hold on to as security against their loan book may have to be increased yet further, after a commission of MPs decided that the current setup is still too risky.

by Michael Northcott
Last Updated: 19 Aug 2013

Bosses in the City will by now be having a serious sense of humour failure. The Commission on Banking Standards has today called on the government to make banks increase their leverage ratio (the amount of cash kept in the business as a buffer to reduce the possibility of total collapse). 

The Commission, which is made of MPs and peers and is chaired by Andrew Tyrie, said that the Bank of England should have the power to stop banks from having assets which amount to more than 25 times their cash. That would make 4%, although chancellor George Osborne has been saying that 3% would be quite enough.

Unfortunately for both the banks and Osborne, the Committee said that it was ‘wholly unconvinced’ by the arguments for less strict capital buffer rules. Andrew Tyrie said: ‘The FPC (Financial Policy Committee of the BoE) should immediately be given the duty of setting the leverage ratio. Almost certainly, a leverage ration of 3% is too low.’

So, what is this likely to mean in practice? Well, ultimately, the Committee is just a sounding board, and if Osborne doesn’t agree with what he hears, he’s ultimately under no obligation to carry out its recommendations. However, the government has said that it supports the idea of an ‘electrified ring fence’ to protect banks’ retail operations. The ‘electric’ bit means that if a bank is finding loopholes to ignore the intended effect of the ring fencing, then the government can forcibly separate the investment arm from the rest of the bank.

Meanwhile, and somewhat hilariously, a new survey of finance professionals has shown that almost two-thirds of bankers in the City think they were ‘unfairly underpaid’ in 2012. The survey, by recruiter Selby Jennings, even asked respondents to ‘take the current market conditions into account’, but still almost 64% said they were ‘unhappy’ with their pay deal. 

You would think, with an attitude like that, these bankers actually want a worse reputation than they already have. And given all the scandal that banks are wrapped up in at the moment, bemoaning your giant salary verges on the sociopathic...

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