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 counter-cyclical 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 counter-cyclical 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.
BlueCrest is hedging its bets no more
“So long, clients, you’ve been holding us back with your over-cautious approach to risk; we’ll make loads more money without you.”
Naturally, this was not how Mike Platt, founder and boss of BlueCrest, one of the UK’s leading hedge fund managers, told his external investors that their $8bn of funds were no longer wanted. He is a polite billionaire and he thanked them for their custom.
But the logic of why BlueCrest, one of the world’s largest hedge funds, is turning itself into a private partnership is as summarised. Platt calculates that BlueCrest will be better off by dropping its passengers and managing only its own partners’ fortunes. “The new model provides the opportunity to create significant value for our partners, our traders and our staff, due to a step-change in profitability,” he said.
On the face of it, the decision seems bizarre. Managing $8bn produces $160m of revenue when you charge a basic fee of 2%. BlueCrest’s assets under management have fallen in recent years, but you can still hire a lot of traders and computers for that money.
The problem, it seems, is that the clients don’t share BlueCrest’s appetite for backing its trading positions with debt and the hedge fund’s trading strategy seems to depend on leverage to produce decent returns, at least in today’s low interest rate world. For the past three years, BlueCrest’s main fund has returned 4% on average, which doesn’t excite. Memories of the 45% BlueCrest achieved in 2009 have faded. In liberated form, the BlueCrest partners can bet their own money as aggressively as they wish and try to recapture past glories.
Call it a tale of the times: institutions have become more careful and the hedgies, or some of them, pine for the old days. In the circumstances, divorce does indeed seem the best option.
Staley on the starting blocks at Barclays
When Jes Staley, new chief executive of Barclays, addresses staff for the first time on Wednesday he should make one thing clear: the giant plastic blocks in the head office foyer, labelled “respect” and “integrity” and so on, are staying put.
Staley has been caricatured, almost certainly unfairly, as the man who will cut former chief Antony Jenkins’s “purpose and values” moralising – embodied by the blocks – and get back to the job of making money for Barclays shareholders. But it would be highly dangerous if traders fell for such misleading pre-publicity.
Keep the plastic. The blocks aren’t pretty but removal would send the wrong message.
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