This morning has seen one of my main themes in full play. One way of looking at is that the regulators are always taken over by the regulated. But in this instance it was not necessary as the first priority of any central bank is to look after the banks. So this morning “The Precious! The Precious” will have been heard echoing around the hallowed halls of the Bank of England.
The Committee judged that the updated appropriate benchmark for the system-wide level of Tier 1 capital requirements was now around 13% of RWAs (equivalent to a CET1 ratio of around 11%), 1 percentage point lower than its previous benchmark of around 14%.
It used to be the case that this would start some literal extra bank lending via the multiplier. But in spite of some claims we abandoned that through the 70s with the final coup de grace given by the 1979 ending of exchange controls. But banks do now have the ability to lend more should they choose and let’s face it they usually do.
Chancellor Rachel Reeves
There is a sub-plot to this and as so often at the moment it involves our rather hapless Chancellor. Remember this?
At Mansion House last year, I said we must regulate for growth and not just for risk…
…and we are delivering on that commitment…
…while continuing to protect financial stability…
…so that the benefits of a thriving and growing financial services sector can be realised for people all over Britain.
Let me set out the details of that package in four parts:
First, I am rolling back regulation that has gone too far in seeking to eliminate risk;
That was from her Mansion House speech in July. As you read this next bit you may wonder what is the point of a Financial Policy Committee at the Bank of England if the Chancellor tells it what to do?
I welcome the Financial Policy Committee’s announcement that it will review the overall level of bank capital needed for UK financial stability…
…reporting back to me by the end of this year.
Those who claim that the Bank of England has policy independence are probably hiding under a rock this morning.
In fact yesterday Chancellor Rachel Reeves went further as we can see from the remit letter.
The government is also clear the UK must now regulate for risk and for growth, and is taking significant steps to ensure the UK remains competitive in a changing world.
Do not say I never provide any humour as that is a moment of pure comedy! Her policies have done exactly the opposite. But she gave a pretty clear direction for today’s move.
| expect the FPC to play an active role in delivering this vision, through its primary objective to maintain financial stability and by supporting the government’s economic policy under its secondary objective.
You may note that these days all of the supposed roles of the Bank of England have been usurped by supporting government policy which has become primus inter pares. There is no independence here although the Bank of England will have received this direction in the same way I would receive one telling me to support Chelsea football club.
Changes for the banks
As you can see below the Bank of England justification involves saying the same thing three times. Isn’t that how the Candyman was called?
That judgement is consistent with the evolution in the financial system since the FPC’s first assessment in 2015, including a fall in banks’ average risk weights, a reduction in the systemic importance of some banks, and improvements in risk measurement.
By the way I am putting “improvements in risk measurement” in my financial lexicon for these times and I rather suspect it will be later followed as below.
lessons have been learned
nobody could have expected this
it is no-one’s fault.
In fact they seem a;ready afraid of this as they try to apply some cover.
The Committee has also identified areas for further work, including on buffer usability, the implementation of the leverage ratio in the UK, and initiatives by the Bank to respond to feedback on interactions, proportionality, and complexity.
Along the way this caught my eye.
UK household and corporate aggregate indebtedness remains low.
Only yesterday the Bank of England released this.
The annual growth rate for all consumer credit remained unchanged at 7.2% in October. Over the same period, the annual growth rate for credit card borrowing slightly increased, to 10.9% from 10.8%, while the annual growth rate for other forms of consumer credit decreased to 5.5% from 5.7%
As you can see consumer credit is on rather a tear as what else in the UK is growing at 7.2%? That is only one sector but more comprehensive numbers are below.
The flow of sterling net lending to private sector companies and households (M4Lex) was £13.0 billion in October, compared to £19.6 billion in September. October’s lending was driven by NIOFCs and households borrowing £8.2 billion and £4.7 billion respectively, while net borrowing by PNFCs was zero.
UK household debt was £1930 billion in October and growth is picking up towards an annual rate of 4%. Aggregate credit if we ignore the financial sector is £2440 billion and growing at 5%. So with economic growth around 1% to 1.5% it is pretty hard to argue we have low debt and are credit constrained. Perhaps they hoped no-one would look up the actual numbers.
Mortgage Lending
This is a type of history lesson and let me take you back to 2012 and the Funding for Lending Scheme.The FLS was presented as being for small and medium businesses or SMEs. The reality was that mortgage lending soared and SME lending flatlined at times and fell at others.
Now let me go back to the new remit letter.
Changes to the Committee’s recommendation on mortgage lending will helpthousands more working people realise their dreams of becoming homeowners.
Where do you think they plan for any new bank lending to go?
House Prices
The research student leading the Bank of England morning meeting will have skipped to work with a smile on their face. Not only could they remind the Governor about the plan to cut bank capital rules, but there was also this.
House prices were up 0.3% month on month ( Nationwide)
The room will have echoed to cries of “Well played Governor” as he smiles in response. Indeed every person in the room will independently point out that Governor Andrew Bailey has handled what could have been a tough period for house prices with skill, aplomb and finesse. In return he is likely to instruct the uniformed flunkeys to provide only the best cakes for the cake trolley today.
Comment
Now here comes the real swerve which is that whilst the Chancellor has directed all of this she has been doing the Bank of England’s bidding. Or as Aretha Franklin put it.
Well, take another look and tell me, baby(Who’s zoomin’ who?)Who’s zoomin’ who?(Who’s zoomin’ who?)Now the fish jumped off the hook, didn’t I, baby?(Who’s zoomin’ who?)Yeah.
The Bank of England is never happier than when it is supporting “The Precious! The Precious!” and especially to boost house prices. So when the present hapless Chancellor was desperately looking for pro growth measures they knew that she would cling to this like a drowning woman clings to a branch.So she has directed them to do what they wanted but were afraid to do until there was cover.
‘Oh what a tangled web we weave
When first we practice to deceive, ( Sir Walter Scott)
In essence the role of the FPC is to claim they are “vigiant” whilst helping the banks as much as they think they can get away with.It would be better if we saved their salaries and scrapped ot.
