Britain's regulators should tone down their attacks on the banks, slow the introduction of new financial rules and clarify the future structure of the industry to encourage lending and stimulate growth.He defended this position by observing
Pressure on liquidity and capital, plus continued debate on what is an allowable banking model, is pushing them to deleverage more than they might be forced to anyway. I think this is an area where the US managed, by being rather over generous on any objective basis, to get their banks out of crisis mode and back into lending mode more than we have.
"I would be seeing if there were things we could do... that would be more effective than denouncing them for continuing to pay dividends and bonuses, which is a perfectly valid point but in macroeconomics the job is to get the aggregates to move."
Sir John said banks have been led to believe they must boost their safety buffers, in part by cutting credit. "The rhetoric has been one which says we want to see you go faster and further," he said. Banks have already cut lending to UK companies by £151bn since December 2008, according to official figures.
Lack of clarity about how banks should be structured in future is not helping, he added.
- Structured finance securities could actually be valued by market participants and as a result the buyers' strike in the ABS market would be over;
- Banks would be subject to market discipline and as a result they would be reducing their risk profile while selling newly originated loans in the ABS market;
- Bailouts for banks in a modern financial system would not occur as the banks are designed to absorb the losses on all the excesses in the financial system today and rebuild their capital through retention of future earnings. Having Wall Street rescue Main Street would have saved the real economy from the damage caused by the excess debt and reduced the need for central bank intervention; and
- Market participants could actually trust Libor to reflect the cost of funding to the banking system because it would be based on the actual cost of funds by the individual banks.