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The Bank of England must think again on systemic risk 

February 18, 2016

John Vickers, The Financial Times

A central lesson of the crisis of 2008 was that banks had woefully inadequate equity capital. When banks could not absorb their losses, taxpayers had to — and we are still paying the price. Seven years on, the fundamental question of how much capital British banks should have has not been decided.

In late January the Financial Policy Committee of the Bank of England published a consultation paper on a “systemic risk buffer”. This is the additional capital that domestic banks of systemic importance must have, usually measured as a percentage of so-called risk-weighted assets (RWAs), a concept used by regulators to determine capital requirements. The buffer is added to the baseline in the Basel III global regulatory framework, which requires banks to have equity capital equivalent to at least 8.5 per cent of their RWAs.

The Independent Commission on Banking, which I chaired, thought the Basel baseline was too low and recommended in 2011 that the retail operations of major British banks should have an extra equity buffer of 3 per cent of RWAs. Probably six banks — the bulk of British retail banking — would have been at this level, with a few others at a lower one. Read more

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