John Vickers, the Oxford University economist charting the future of U.K. banks, has already contributed to a 60 billion-pound ($96 billion) slump in the market values of Barclays Plc (BARC), Royal Bank of Scotland Group Plc (RBS) and Lloyds Banking Group Plc. (LLOY)
His recommendations, published next week, will help decide whether the sell-off continues.
Since the government-appointed Independent Commission on Banking’s first report in April, the market capitalization of RBS has been cut by 23 billion pounds, or 48 percent, Lloyds by 20 billion pounds, or 47 percent, and Barclays by 17 billion pounds, or 46 percent, up to the close of trading in London yesterday. The final report is due on Sept. 12.
“The ICB has definitely had a negative impact on U.K. bank stocks,” said Shailesh Raikundlia, a banking analyst at MF Global Ltd. in London. “Analysts and investors are hoping for some clarity from Vickers” or the effects will be “very negative,” he said.
Vickers, 53, a former Bank of England chief economist, and his four fellow commissioners will probably tell Britain’s biggest banks they must hold more capital, insulate consumer units against collapse, so-called ring-fencing, and ensure taxpayers don’t fund the costs of bank bailouts, according to the April report.
As much as 25 billion pounds of the drop in British bank market capitalization can be accounted for by investor concern about the ICB conclusions and other regulatory risk, Citigroup Inc. analysts including Leigh Goodwin said on Aug. 31. The taxpayer’s shareholdings in RBS and Lloyds have fallen by about 10 billion pounds as a result of the ICB’s interim proposals, the analysts said.
Future Profitability
At stake is the future profitability of Britain’s lenders. The commission’s proposals could reduce U.K. bank earnings in 2012 by an average of 28 percent because of increased funding costs and prompt further asset sales and capital raisings, JPMorgan Cazenove analysts said on Aug. 31. Banks and their lobbyists have said the plan would put the industry at a competitive disadvantage that could force them to relocate overseas.
European banks have also fallen since April, amid concern that the continent’s sovereign debt crisis will hit lenders. The decline among the 46-member Bloomberg 500 Banks Index since the ICB report to yesterday is 35 percent
“If you take out the ICB effect, you would have expected U.K. banks to have outperformed their European peers significantly,” Raikundlia said, given that the U.K. is not a member of the euro.
‘Need to Deleverage’
“Concerns over ring-fencing and the subsequent impact on business models have been a major factor in the de-rating of domestic U.K. banks, but ongoing funding issues, the need to deleverage and significant Irish exposures have also played a part,” said Jonathan Tyce, senior analyst for the Bloomberg Industries European banking team in London.
The commission said in April that the largest consumer banks should have a core Tier 1 capital ratio, a measure of financial strength, of at least of 10 percent and that Lloyds should sell more assets beyond its planned disposal of 632 branches. While the scope of its proposed ring-fence for consumer units is still being considered, such units must be able to function and investment-banking activities be able to fail safely, the commission said.
Plan Endorsed
The two parties in the coalition government have endorsed the idea of ring-fencing, leaving open the issue of when to implement the decision. Chancellor of the Exchequer George Osborne said in July he will wait for the final report before deciding how much extra capital British banks should hold beyond the 7 percent core Tier 1 ratio required by the Basel III agreement.
The report will be presented to the Cabinet banking committee, which can accept or reject the findings.
A person with knowledge of the discussions said last week that banks won’t be compelled to implement the ICB’s proposals until 2015 at the earliest because the issues are complex. Banks and industry lobbyists have argued that any new rules should be postponed because of the U.K.’s faltering economic recovery.
On Sept. 5, Ernst & Young LLP’s Item Club estimated that the ICB proposals may cut British gross domestic product by 0.3 percent and force companies to pay 1.5 percent more on loans.
A parliamentary Bill to implement ICB recommendations will need to be approved by both the House of Commons and the House of Lords before it can receive assent from Queen Elizabeth II and become law. The process normally lasts several months after it has secured a place on the government’s legislative timetable.
‘Hard Line’
“I would expect that Vickers will stick to a relatively hard line,” said Simon Willis, an analyst at Daniel Stewart Securities Plc in London “But then the likelihood is it gets diluted in some way or other, or its time frame is extended such that the ultimate impact is lessened.”
The proposals should be “phased in over a number of years,” said Andy Lynch, who manages about $1.9 billion including bank stocks at Schroder Investment Management Ltd. in London and who said he was speaking in a personal capacity. “In the long term, it makes sense to protect retail depositors and reduce the risk to the economy, but as any doctor will tell you, if you have a patient who’s ill, you don’t send them immediately out to run a marathon.”
Vickers’ team also includes Martin Wolf of the Financial Times, Bill Winters, the former co-chief executive officer of JPMorgan’s investment bank, Martin Taylor, formerly CEO of Barclays, and Clare Spottiswoode, the former head of the gas regulator Ofgas.
‘Unequivocal’ Assurances
Two months ago, a British parliamentary committee urged the ICB to give greater consideration to the risks of erecting firewalls around lenders’ retail units and said it hadn’t thought enough about breaking up institutions that are too big to fail.
In May, Vickers told a House of Commons committee that he had received “unequivocal” assurances from the government that his commission’s independence would not be compromised.
“John Vickers seems to have dug his heels in and I think he’ll go with what he thinks is right,” Simon Willis said.