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  1. Wealth
September 12, 2011

How the Vickers Report Affects the Wealthy

By Spear's

The Vickers Report on banking reform, published today, provided little clarity on how HNW private banking clients would be affected

The Vickers Report on banking reform, published today, provided little clarity on how HNW private banking clients would be affected. According to the report, certain HNW clients could choose to keep their deposits outside of the ring-fence, but the report did not specify whether private banks would generally fall outside the ring-fence, precisely which clients would be able to opt-out of banking within ring-fenced banks, or how this might affect private banking services and costs.

The report said that as HNW private banking clients are more likely to use more than one bank, have the resources to assess the safety of their banks, and should be able to use alternatives should one of their banks fail, they would be ‘permitted to place their deposits outside ring-fenced banks’. In this case, they would have to certify that they understand that their deposits are being held outside the ring-fenced bank.

However, when asked by Spear’s whether private banks would generally be positioned outside the ring-fence, and what effect these changes would have on HNWs, Sir John Vickers failed to provide any further details, referring us once more to the relevant 13-line paragraph in the 358-page report.

The criteria for determining which clients would be allowed to opt out of depositing their assets within the ring-fence were also left vague in the report. It specified only that the ‘stringent limits’ would be ‘in line with the assessments commonly made of private banking customers’ and would ensure customers should ‘at minimum have adequate knowledge and experience of financial matters and have substantial liquid assets.’

Whether HNW deposits at private banks will be outside the ring-fence is not a trivial distinction. Banks within the ring-fence would have more stringent minimum capital requirements than investment banking arms, and would be barred from undertaking trading or markets business, trading derivatives (other than hedging retail risks), supplying services to non-European customers or services resulting in exposure to financial companies.  

Sir John Vickers, chairman of the ICB, said the greater costs associated with complying with stricter capital requirements would be hardest felt outside of the ring-fence. ‘Our financial stability proposals may increase some banks’ costs of capital and unsecured debt, especially outside the ring-fence. But that is largely a consequence of returning risk-bearing to where it should be – with investors and not taxpayers,’ he explained.

The proposals outlined in the Report will have to pass through Parliament, and Vickers said that ‘it would be good all round, not least for financial markets’ if the legislation could be passed within the current parliament, and be implemented by 2019. Some time before this, parliament will have to clarify what status private banks will have and who will be allowed to place their deposits outside of ring-fenced banks — but on this point too, no further detail has been given.

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