For 15 years banks, in most instances, chose their capital levels; now an agency of the state decides. So said Paul Tucker, deputy governor of the Bank of England, Tuesday in a timely reminder of how regulation is meant to work.
It was timely because Barclays and Nationwide have been moaning non-stop since the Bank's Prudential Regulation Authority (PRA) last month highlighted the pressing need to get leverage ratios up to 3%. Barclays, at 2.5%, and Nationwide, 2%, feel they have been caught on the hop. Why is this demand suddenly so urgent? In the case of Barclays, the chief executive, Antony Jenkins, has to cut lending if he is made to meet the 3% goal soon, rather than in 2015, as he intended.
Sympathy for the grumblers extends only this far: the PRA could have done a better job on the communications front. It should have signalled more clearly that the UK was never going to be satisfied with the international deadline of 2018 to comply with a 3% ratio. It should have outlined its preferred timetable earlier. But the banks cannot pretend they have been whacked with an arbitrary diktat. Come on, a 3% leverage ratio – which allows a bank to have just £3 of equity supporting £100 of lending – is hardly a case of overkill by financial health and safety fanatics.
The Independent Banking Commission, and many other observers, thought a 4% ratio ought to be the minimum. Barclays, if it had thought more carefully about capital and leverage, could have made deeper cuts to its bonus pool in recent years, rather than embarking on a "journey" of pay reforms that looks more like a crawl.
On the timing front, the PRA has at least made clear when it expects 3% to be achieved – there is "a presumption that we do want this to happen as soon as possible", said the executive director, Andrew Bailey. The vague wording leaves some room for negotiation, but the message to Jenkins seems clear: don't argue with the referee. Sound advice.
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