Finance Essay Example | Topics and Well Written Essays - 1000 words

Finance - Essay Example The government also gives a further indication for implementation of the recommendations. Hence, detailed explanation has been done in this paper to explain the rationale behind two of the recommendations of Vickers report. Retail Ring-Fencing One of the most controversial recommendations of the Vickers Commission is that the banks’ retail operations should be ring-fenced. Banks will be required to establish a separate legal entity within their corporate structure to provide retail and commercial banking services all over the country. The reason behind this to protect retail banking operations from risk-oriented financial activities and to ensure the continuous provision of retail banking services by ring-fenced banks, with reduced bail-out costs for taxpayers. The government agreed with Vickers Commission that banks should have relative freedom in respect of their investment. Banks will be permitted to continue copyrighted trading. The logic is that investment of UK banks sho uld operate without an implicit government guarantee and be allowed to fail in an orderly manner in case they enter into financial crisis. It is also predicted that the banks in UK will face challenges in implementing ring-fencing requirements, given their current corporate structures. ... The large exposure limits that are recommended in the report are designed to reduce the exposure a ring-fenced bank will have to other entities within its group. However, allowing secured exposure up to 45% of capital may prove unproductive in light of the write-downs of sovereign and asset-backed debts in the financial drawbacks (Kevin, 2007). Raise bank capital requirements The Vickers Commission has separately made various recommendations intended to raise the capital requirements of the banks in United Kingdom. It is also an attempt to increase the ability of banks to absorb losses or any other financial crisis. The ratio of equity to RWAs proposed by the Vickers Report for ring-fenced banks (of 10%) is higher than that proposed in Basel. The requirement for banks to have loss absorbing capacity of 17% is essentially more burdensome than under Basel III (Patrick, 2011). Therefore important banks will be required to hold capital at 11.5-13% of RWAs (Michael & Bernard, 2007). The g overnment of UK agreed that 17% is the appropriate number for large institutions, subject to further consultation. Moreover, accommodative tax regime will be required subjected to capital instruments subordinated debt for banks so that they could use these instruments to meet their enhanced capital ratios. HMRC is currently looking at ways to ensure these instruments work effectively and therefore reduce tax on interest payments. An important concession has been made by the government to UK-based multinational banks. The Vickers Report had proposed that such banks were required to have primary loss absorbing capital equal to 17% across all their operations. However, the government has stated that as long