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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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  • From Keynsian thinking, asking the banks to lend more makes sense. The problem is, it always makes more sense. The banks have never opposed new subsidies, and aren’t about to start now.
    But we’re in end-game for that process. Bankers have kicked the subsidy can down the road since 2007, and have only succeeded in widening the risk to the entirety of Europe. Greece –> Cyprus, and we don’t know yet who’s next.
    The stakes in the game are now much bigger than any one bank, and indeed bigger than a country’s banks. When the can-kicking game stops, pain must be taken.

  • Couldn’t agree more Chris. Allowing new entrants in with as little capital as £5m could mean that we see customers being tempted in by new entrant offers only to see the new entrant go quickly bust. It might be new competition in the banking sector but it will very quickly damage what little confidence there is in the banking sector.

  • Matthias Benfey

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