The Government’s Banking Policy Mess
It’s been a very busy few days for those of us interested in banking policy – the mammoth report of the Parliamentary Inquiry, the Mansion House speeches and today’s call for more capital from the Prudential Regulation Authority.
Taking the Parliamentary Report first, my initial conclusion is that it is very long. To be entirely honest I’ve only read around half of it so far, so it is too early to give a full reaction. On the other hand there are some parts that are to be welcomed.
The overall tone of the report recognises that things have gone wrong in the sector and need to change. Criminal sanctions and the new senior persons’ regime look like useful steps.
The suggestion the bondholders should have role in governance is very interesting indeed and neatly ties in with Andy Haldane’s warnings about the ‘doom loop’ created by shareholders focussing on return on equity. (This has been under-reported but is possibly one of the more significant changes suggested).
The suggestion of delaying bonus payments by up to a decade looks to be a step in the right direction but will do nothing to limit the size of bonuses.
On RBS, it almost feels as if the Inquiry has ducked the issue by suggesting a ‘detailed analysis’.
Overall I would have liked the Inquiry to go a bit further in terms of arguing for the changes we need to see a banking sector that actually supports the real economy – in particular the potential British Investment Bank and the place of regionally focussed lenders. (For longer thoughts on this, see my chapter in this Fabian essay collection form January).
Turning to Osborne’s Speech at the Mansion House, the big news was that the Chancellor appears to have dropped plans to privatise RBS before the election but is pushing ahead with plans for a sell-off of Lloyds.
There are two concerns here – first does the Chancellor’s desire to get a good price for Lloyds (and eventually RBS) conflict with calls for tighter regulation and second is the timetable being driven by financial and economic considerations or political ones?
The Chancellor also took the opportunity to once again plug his ‘Help to Buy’ scheme, something which very few economists have welcomed.
The imminent change of guard at the Bank of England takes place against the backdrop of a modestly improving UK economy, albeit one that appears to rest upon a pick-up in consumer spending and a recovering housing market.
“Funding conditions, helped by the funding for lending scheme, continue to look favourable and are supporting more competitive mortgage pricing and availability and a gradual resumption of lenders’ risk appetite.
“While the direction of travel is clear and fits well with the more positive housing surveys from RICS and others, our forward estimate does imply somewhat stronger house purchase activity than we had been expecting.
The PRA has today proclaimed that:
UK banks need to raise billions more in capital to cover their risks, according to the financial regulator.
The Prudential Regulation Authority (PRA) says Britain’s top banks and building societies need to fill a £27.1bn hole in their balance sheets.
Royal Bank of Scotland was the regulator’s main cause of concern, accounting for £13.6bn of the total.
I understand that both Barclays and Nationwide feel a bit miffed about being forced to hit this tough so-called leverage ratio at this juncture, because they are rare in that they have been supporting economic recovery by increasing their net lending.
They now feel they are being penalised for doing what the government wants.
So I would expect there to be something of a spat between government and regulators about all this.
But the big message from the letter is on growth. The Chancellor writes that:
“It is particularly important, at this stage of the cycle, that the Committee takes into account, and gives due weight to, the impacts of its actions on the near-term economic recovery.”
Or, in plainer English – “It’s obviously important to ensure financial stability but right now boosting growth is more important than safer banks”.
Overall Government policy on banking seems to be filled with contradictions.
The current lending numbers are absolutely awful. Just this week the BBA revealed that the big high street banks still have falling lending to non-financial firms and very weak mortgage lending growth.
But we now know that a key aim of Treasury policy, the flagship policy in last week’s budget, is to boost mortgage lending.
BIS is desperately trying to find ways to expand lending to small business (and Vince Cable today has already said that “The idea that banks should be forced to raise new capital during a period of recession is erroneous”), whilst the Treasury is keen on boosting the growth of housing finance. The OBR’s Robert Chote yesterday argued that “banks are a major constraint on the economy”.
In other words macroeconomic policymakers in the Government – whether from HMT or BIS – all want to see lending increased.
Meanwhile the FPC is saying that banks are not in a position to boost lending without more capital. The FPC is saying this at the very same time that the BOE is jointly running the FLS scheme to try and boost bank lending.
(Since I wrote this mortgage lending has improved but not the flow of credit to non-financial firms)
Fundamentally the problem is that the UK’s Macroprudential framework was designed back in 2010 when Osborne still thought he was going to be achieve his ‘new economic model’ of growth led by net trade and rising business investment. Macroprudential policy would act as a restraint on housing bubbles and debt funded consumer spending.
But now the Government have abandoned their pursuit of a ‘new economic model’ (in favour of something that looks very like the ‘old economic model) there is an obvious tension with the new regulatory regime.
I think these Government-banking-regulator spats are likely to continue.