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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!


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Chris , maybe people could talk to these new banks and ask them what they plan to bring to the market.Then we could decide where to place our trust , in the new world of democratized finance. As the strategic risk to the economy and society is negligible maybe the answer is to allow a hundred new models to get started.As Dave Fishwick would say “tell me what i am doing wrong ” .

  • The competition changes are probably a bit subtle and require more explanation. There are several factors.
    Firstly, the (new) competition represents no threat to the economy, whereas the (old) banks are the economy, and are the pain. In contrast to received banking wisdom, since the invention of new monies in the early 1990s, none of them have ever done any economy any damage. So setting low capital requirements on newcomers is actually systemically sound. Indeed, if the reason for capital requirements / regulation is systemic risk, then that’s the end of the argument.
    Next. With the banks showing they’ll fight recovery at every turn, there has to be a way to get the banks to shift. The banks have not shifted substantially to deleverage since 2007, and say they want more leverage. Wrong answer. The only way to get the banks to respond then is to signal that their free lunch is no longer free. Small guys may come along and try and take it away.
    Finally. When/if major banks collapse, as is happening in Cyprus as we speak, the risk to the payment systems is serious. In order to keep the payments flowing, we need alternates. What have we got? Not a lot. Basically cash, which is linked to ATMs and the bank-network. Britain and other countries are far too dependent on their existing fixed single payments architectures. Competition in new payment systems can bring in newer solutions, and it can mean the difference between total collapse and survival.

  • Matthias Benfey

    Lang, thank you for offering a plausible explanation for what seemed inexplicable (the three regulatory changes).