Bank stress tests fail to quell doubts

Mark Carney

Mission accomplished? Assessing the capital health of the UK’s banks is a neverending task, of course, but Mark Carney, governor of the Bank of England, seems pleased with the current state of affairs.

“UK banks are now significantly more resilient than before the global financial crisis,” he declared. Lending to the real economy could continue even if severe stresses materialise. The UK banking system is “within sight” of the optimal level of capital.

The big seven lenders passed their stress tests, though it was a narrow squeak for Royal Bank of Scotland and Standard Chartered. None will have to raise more capital as a result of the tests. Even a hike in the new countercyclical capital buffer, designed to ensure credit keeps flowing when economic storms arrive, “will not, in itself, change the overall capital requirements for UK banks”.

But the best bit, from the banks’ point of view, was Carney’s clear message that fresh capital demands were not on the agenda: “All should be clear, there is no new wave of capital regulation coming,” he said. “Our objective has never been to raise capital without limit. Or by stealth.” Thus the share prices of most banks rose strongly.

It is indeed excellent news that the governor is so confident. Even on much-debated risks, such as the surge in buy-to-let lending in the UK, Threadneedle Street seems relatively relaxed. The Prudential Regulation Authority unit will examine the buy-to-let market but no curbs on lending were announced on Tuesday.

Here’s the nagging doubt: in the aftermath of the 2007-09 crisis, regulators seemed determined to set banks’ capital thresholds far higher than is now deemed acceptable. The UK’s Vickers commission and the international Basel committee spoke of core equity ratios of 18%. In the event, the Bank has settled on 11%.

Carney, to be fair, gave a full explanation. First, capital is better designed these days – bondholders in the biggest banks can be forced to take pain in a crisis, for example. Second, “forward-looking” regulators are making better judgments on risks. Third, those countercyclical buffers can be flexed up and down as conditions require.

The arguments all sound plausible, but 18% to 11% is a mighty leap downwards. Perhaps it was necessary to avoid “the stability of the graveyard”, meaning banks so over-capitalised that they take too few risks. But perhaps more alarmingly, today’s central bankers just have complete faith in their ability to spot dangers.

Powered by Guardian.co.ukThis article was written by Nils Pratley, for theguardian.com on Tuesday 1st December 2015 13.49 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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