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December 22, 2011

Capital rules and the capital’s needs

 

“These banks are not alone in grumbling about the regulatory burdens imposed by Vickers. That they have got a sympathetic hearing in Whitehall perhaps reflects government fears about the psychological impact of a global bank such as HSBC upping sticks. George Osborne, the chancellor of the exchequer, has offered to water down this rule. If the banks can prove that the UK taxpayer will never have to foot the bill for any disaster at their international operations, they will be able to avoid applying the full UK requirements to their foreign units.”

“Given that they will still have to abide by the rules for their UK businesses, this seems a superficially sensible compromise. After all, a bank like Standard Chartered does not have any substantive operations in the UK. HSBC, too, earns the majority of its profits in Asia where much local business is routed through separately capitalised subsidiaries. In theory, therefore, an overseas problem could be contained locally.”

“But this presupposes – and it is a big “if” – that the resolution mechanisms that should enable a problem to be contained will actually work as intended. These are supposed to allow regulators to dismantle failing institutions – firewalling the sound parts from the rotten ones and letting losses fall where they occur. These special regimes have never been tested. No one really knows how they will fare in a crisis such as a 2008-style panic or a sudden downturn in a large economy such as China.”

Read the full editorial here.

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