From the FT on Wednesday:
Vince Cable, business secretary, has lifted the lid on tensions between the government and the Bank of England criticising its “capital Taliban” whom he accuses of holding back the recovery by imposing excessive financial burdens on the banks.
He’s angry that the Bank (well, the “jihadist” element, at least) are holding “back small business lending by demanding banks hold onerous levels of capital as a cushion against further shocks.”
We may have to take this blog into list format…
First: “capital Taliban”. Seriously Vince? Is that ever an acceptable phrase? We’d love to see the focus group that okayed that one.
Second: have you considered Threadneedle Street’s independence? If phrases like “capital taliban” are deemed acceptable at the moment, what is going to happen if/ when the Bank says “help to buy” should be stopped three years from now. A proof of Godwin’s Law in British politics perhaps?
Third: the Nationwide element of this is complicated by its mutual status, which makes it difficult to increase capital except through making profits (as Peston noted recently, Core Capital Deferred Shares might be a potential solution) and thus Vince might have a point. Nationwide might cut back on lending to nudge its ratios due to the constraints it’s working under. But before we mention the obvious trade-off, it might be worth reiterating the general confusion about capital here. Essentially that the link between capital and lending isn’t as clear cut as often made out. From Admati’s opening salvos in “The Bankers New Clothes” (no apologies for big chunk, it’s good):
One argument was given in 2010 by the British Bankers’ Association, which claimed that new regulations would require U.K. banks to “hold an extra £600 billion of capital that might otherwise have been deployed as loans to businesses or households.” To anyone who does not know what the regulation is about, this argument may look plausible. In fact, it is nonsensical and false…
From the statement of the British Bankers’ Association, however, we would not guess that capital requirements are about how much a bank borrows. The statement makes it appear as if capital were a cash reserve—a pile of cash that banks hold that cannot be used to make loans.
In fact, capital regulation does not tell banks what to do with their funds or what they should hold. It tells banks only what portion of the funds they use must be unborrowed. Saying that new regulations would require U.K. banks to “hold an extra £600 billion of capital” is nonsensical. The implication that loans to businesses or households are automatically reduced by that £600 billion is false. Capital is not a rainy-day fund.
The confusion about the term bank capital is pervasive. Numerous media reports say that banks must “set aside” capital to satisfy new regulations. References to capital reserves suggest that the regulation forces banks to hold cash that sits idly in the bank’s tills without being put to work in the economy. A bank lobbyist is quoted as saying, “A dollar in capital is one less dollar working in the economy.”
This confusion is insidious because it biases the debate, suggesting costs and trade-offs that do not actually exist. The trade-offs exist for reserve requirements, which call for banks to hold some fraction of their deposits in cash or in deposits with the central bank. However, capital requirements are distinct from reserve requirements and do not give rise to the same tradeoffs. Confusing the two makes it easier to argue that capital requirements prevent banks from lending when this is not actually true.
At least for banks that are organized as corporations, bank capital requirements have no automatic effect on bank lending. If capital requirements are increased, there is nothing in the regulation that would prevent these corporations from issuing additional shares and raising new funds to make any loans and investments that they might find profitable.
Banks that do not have access to the stock markets, as well as those that do, can increase their equity by retaining and reinvesting their profits. What the banks would choose to do with the funds and why they would make these choices are different matters that are obviously important. But there is no sense in which capital regulation forces banks to shrink or prevents them from making loans. Viable banks can increase their reliance on unborrowed funds without any reduction in lending.
Fourth: Have you considered how this will look if Nationwide fails? It is telling that it is the business secretary that has spoken out. While the FT’s article mentions a Treasury official who warned of the ” jihadist tendency” among regulators, no senior finance ministry official has put their name to the comments. While some Treasury officials clearly share Mr Cable’s disdain for the BoE’s approach to capital, finance ministry staffers have long learnt to be careful about speaking out about the regulation of individual institutions, being far more sensible than to make themselves hostages to fortune should that institution collapse.
Fifth: We hope Vince is looking forward to saying hi to Mark Carney soon. It is understood that the two will be meeting in the next few days. Oh to be a fly on the wall.
By Claire Jones and David Keohane
Vince Cable, loony – FT Alphaville
Nationwide saga underlines policy tension over lending – FT