British banks are still not holding enough capital to protect them against further shocks and must take action "as early as feasible" to raise funds, the Bank of England has warned.
The warning from the Bank's new Financial Policy Committee, created as a new risk watchdog, underlined the ongoing fragility of the banking system.
A statement released following the FPC's meeting on March 16 said: "The Committee remained concerned that capital was not yet at levels that would ensure resilience in the face of prospective risks and noted that the ability to make further progress via greater restraint of cash distributions was limited.
"It therefore advised banks to raise external capital as early as feasible".
The FPC said that banks had gone as far as they could to raise capital by keeping down pay, dividends and share buybacks.How much capital do UK banks need to raise?
As we know from RBS's Stephen Hester's confession, regulators have blessed UK banks hiding losses on and off their balance sheet. So we know that capital is needed to fill the hole left by existing losses.
Why would anyone buy stock in a bank and absorb these losses? After all, there is a reason that Stephen Hester referred to investing in banks as dumb.
Setting aside that question, clearly the Bank of England feels that there is a need in the short term for additional capital beyond these losses. How much more capital is needed?
Without banks providing ultra transparency and disclosing on an on-going basis their current asset, liability and off-balance sheet exposure details, market participants have no way of assessing the risk of each bank and the amount of capital necessary to support this risk.
The bottom line is between the hidden losses and the lack of disclosure it is impossible for market participants to figure out exactly how much more capital the banks need.
As a practical matter, this is okay because, as the OECD tells us and this blog has presented the supporting reasons, bank capital is meaningless. This is best illustrated by the simple fact that so long as a bank has access to a central bank for liquidity and depositors think the state's guarantee of their funds is good, a bank with negative book capital can continue to operate for decades until the financial regulators close it.
Given that the lack of ultra transparency makes it impossible for the market to figure out how much capital is needed and the fact that capital is meaningless, how come the Bank of England wants more of it quickly?