UK bank commission head asks central bank to think again on capital

By Huw Jones

LONDON, April 19 (Reuters) - The Bank of England is toooptimistic about being able to close big banks smoothly if theyrun into trouble and lenders should hold far more capital tokeep the financial system safe, the architect of a major bankingreform said on Tuesday.

The Independent Commission on Banking (ICB) chaired by JohnVickers recommended after the financial crisis that banksring-fence capital equivalent to 3 percent of risk-weightedassets, while the Bank of England says the level should be 1.3percent.

In response to previous criticisms from Vickers, BoEGovernor Mark Carney published a 13-page letter to parliament onFriday, setting out how why banks in Britain generally holdenough capital to act as a buffer against systemic risk.

But Vickers told an audience including former regulators,central bank officials and Clara Furse from the BoE's FinancialPolicy Committee that the assumptions underpinning the bank'sarguments were not realistic.

"The BoE should think again," Vickers said in his speech atthe London School of Economics on Tuesday.

"The Financial Policy Committee should use to the full theopportunity it now has to make UK retail banking safer, andintroduce a 3 percent systemic risk buffer for all majorring-fenced banks," Vickers, a former BoE chief economist, said.

"With more prudent and realistic assumptions, the BoE's ownanalysis indicates the need for that. The BoE's current proposalfalls short," he said.

The spat between Vickers and the BoE over capital levels hasirked the central bank and prompted parliament's Treasury SelectCommittee to review bank capital requirements.

Carney has said no significant extra capital was neededbecause banks face other requirements, such as acounter-cyclical capital buffer, and changes that make themeasier to close down - two reforms which Vickers said were nofoolproof substitute for higher capital.

Under current plans, the deposit-taking divisions of banksmust have the extra ring-fenced capital in place from 2019.

The reform is considered among the toughest of its kind inthe world and has forced HSBC, Barclays, Lloyds and RBS to makeinternal changes.

Vickers' comments also come at a time when the financeministry wants a "new settlement" with banks, which has raisedconcerns among some lawmakers that banking rules are beingwatered down. (Editing by David Clarke)