Andrew Bailey, head of the Prudential Business Unit at the Financial Services Authority, has said new rules that come into force next year will put “the emphasis on economic well-being as an ultimate goal” of bank regulation....
Mr Bailey’s comments will unsettle bank executives who already fear that the regulators are being too interventionist.
Earlier this year, Peter Sands, chief executive of Standard Chartered, said the notion that regulators could “anticipate all risks and micro-manage such an important part of the economy is dated and wrong”, adding that the policy “reeks of 1970s-style quasi-nationalisation of the industry”.The UK is having the same experience as the US. It is in the process of adding complex rules and regulations in combination with regulatory supervision as a substitute for transparency. With transparency, market participants can exert discipline on bank risk taking and promote the public interest.
What everyone other than the regulators learned from the financial crisis is that regulators and complex rules and regulations do not result in economic well-being when substituted for transparency.
In his speech to the Edinburgh Business School, Mr Bailey risked antagonising the industry further by reiterating that banks need to raise more capital, despite applauding the “substantial progress” they have made in the last four years....Your humble blogger has repeatedly discussed how bank capital is an accounting construct that is easily manipulated by both the banks and regulators.
As a result of this ease of manipulation, which was confirmed by the Bank of England's Andrew Haldane observation that banks are 'prevaricating' on the value of their legacy assets, the OECD declare bank capital meaningless.
So it is hard to see how regulators pushing for more of something that is meaningless will be helpful.
Outlining the regulator’s priorities, Mr Bailey said there were “two important objectives: seeking to increase the resilience of the UK banking system, including the threats emanating from the euro areas; and supporting the creation of credit in the UK economy”.The first objective could be achieved ASAP if the regulator required the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
With their euro area exposures disclosed, it is amazing how fast the banks would rein in their risk to what they could afford to lose.
Separately, he confirmed that regulators have relaxed capital requirements on new lending to help stimulate growth. “We have allowed banks to reduce the capital buffers they hold over the minimum requirements in line with new lending to the UK economy,” he said.
“Our view here is that a reduction in the risk arising from this new lending caused by an improvement in credit conditions should offset the risk from lowering capital buffers.”This shows a complete lack of understanding about how lending works. Lending and the financing of the resulting loans are completely separate.
Banks make loans on an opportunistic basis. If they don't hold the loan for their own balance sheet, they can always pass the loan on to another bank, a syndicate of banks, insurers or pension funds just to name a few.