Tuesday, March 19, 2013

BoE's FPC must leave no doubt about strength of UK banking industry

The Guardian's Jill Treanor called on the Bank of England's Financial Policy Committee to leave no doubt about the strength of the UK's banks.

There is only one way to do this:  require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

It is only with this information that market participants can actually assess the strength of the banks.

when the FPC decided to ask the Financial Services Authority – which has just one more week left before it is disbanded – to review the industry's capital at the end of December it estimated that the hole could be as big as £60bn
This comprised £15bn from granting forbearance, or leniency, to customers having difficulty maintaining payments on loans; £10bn for a potential new wave of compensation claims for misselling; and £35bn for the way international capital rules require banks to set aside capital against the risk of the loans they hold.
And nothing for the losses on the securities in the banks' portfolios, think toxic subprime mortgage-backed securities, that are held at cost, but would show significant losses on a mark-to-market basis.
Analysts are making their own calculations of what the shortfall might be.
Calculations?  Given the lack of disclosure that has FPC member Andrew Haldane calling banks 'black boxes', calculations is far too precise.

Rather, analysts are putting their finger in the air and blindly guessing.
Credit Suisse has concluded it could be £38bn for the big four banks – Barclays, HSBC and the bailed out Lloyds Banking Group and Royal Bank of Scotland. The Credit Suisse analysts reckon some £11bn of that has already been raised by holding on to earnings, cutting back on risks and issuing new instruments to raise capital. 
Ian Gordon, analyst at Investec, warns of the risk of a "potentially horrific and dilutive outcome for shareholders" if the FPC requires a major fundraising exercise....

While it is right that the FPC should be reviewing the capital strength of the banking industry, it also crucial that when it publishes the outcome of its ruminations it should not leave any room for doubt about the strength of the industry. 
Each bank should be required to publish its capital shortfall along with a plan of what can be done about it. 
The Americans do it: last week Goldman Sachs and JP Morgan were required to resubmit their plans to make payouts to shareholders. 
Perhaps the UK's regulators should do something similar – even if it means changes to legislation.
The bank capital exercise in the US is not worth the paper it is printed on.  Everyone knows it is absolutely meaningless as the lack of ultra transparency means that no market participant can independently confirm or deny the conclusion.

If the FPC really, truly wanted to do something meaningful about insuring that strength of the UK banking industry, it would strongly recommend that banks provide ultra transparency.

After all, there is no stronger statement that a bank can make about its financial stability than to disclose is exposure details and show it has nothing to hide.

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