Crazy little thing called regs

Maybe it’s just me, but looking through the announcements of the three major regulatory changes the new authorities have introduced, I think they’re a bit nuts.

On the one hand, they are increasing capital requirements for existing banks to avoid future shocks:

Major UK banks must raise a total of £25bn in extra capital by the end of 2013 to guard against potential losses, the Bank of England (BoE) has said.

On the other hand, they are lowering capital requirements for new banks to encourage competition:

Regulators said Tuesday that new banks will need to hold 4.5% in equity capital against assets, less than the roughly 10% levels required at the country’s major banks, and the lowest level possible under coming international rules known as Basel III.

I can kind of understand where they are coming from, but it just does not make sense. 

On the one hand, as Vince Cable is saying (and for once I agree), this means that the existing banks will lend less and the economy will be depressed further:

“The idea that banks should be forced to raise new capital during a period of recession is an erroneous one. This FPC exercise will prolong the time it takes for the British economy to recover by further depressing already-weak SME lending.  I believe the weight of the argument is in favour of counter-, not pro-cyclical, lending measures.”

And then the new players with less experience of risk are being told they can play in the markets with less capital to cover future shocks than those who understand market and credit risk.  As Robert Peston said recently:

A bank with a leverage ratio of infinity run by individuals with god-like knowledge of the true risks of lending would be safer than a bank run by mortals whose leverage ratio is tiny.

All in all, this all seems a bit nuts and not the most auspicious start for our new regulator … but maybe I’m missing the subtle nuance of the fine print somewhere and maybe it is just an April Fool.

Happy Easter!