Macroeconomics and macroprudential regulation: It just got interesting
As Robert Peston wrote yesterday there is an obvious political implication here in terms of RBS/Lloyds:
The likelihood is that the FPC’s capital ordinance will delay the day that RBS and Lloyds – the semi-nationalised banks – can resume paying dividends, which will in turn delay their respective privatisations (the payment of dividends reduces the rate at which capital resources are increased).
However my sense – and it is only that – is that the chancellor’s worst nightmare, that taxpayers would have to subscribe for more shares in Lloyds and RBS, will somehow be avoided. As I’ve mentioned before, it would probably be career suicide for George Osborne if he were forced to further nationalise these banks.
But I actually think the political/macroeconomic implications of this are even bigger.
The shortfall of £25bn could be met in two ways – the first is by raising additional capital, the second is restricting lending and shrinking risk weighted assets.
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.
George Osborne began setting up the FPC in 2010 as part of a ‘new economic model’ based on ‘business investment and net exports’. The problem he has now is that after apparently abondoning that new model in the hope that asset inflation will dig the economy out of its hole, he is running up against a body dewgined to stop this sort of thing.
The interaction of macroeconomics and macroprudential regulation just got a lot more interesting.