Decision to give banks further four years to build up capital buffers gives impression they have again outwitted regulators
How memories fade. Five years ago the UK had witnessed the first run on a bank – Northern Rock – since 1866 while the panic that followed a year later when Lehman Brothers collapsed led to £65bn of taxpayer money being poured into Royal Bank of Scotland, Lloyds and HBOS.
Indeed in 2010 Lord Turner, chairman of the Financial Services Authority, was calling for “tighter capital and liquidity controls on all banks”.
Yet on Sunday night banks wrung a crucial concession from international banking regulators based in the Swiss city of Basel who gave them another four years to build up enough cash to survive a 30-day credit crunch. The banks could hardly contain their glee, describing the announcement from the Bank for International Settlements committee of banking supervisors as a “twelfth night present”. Little wonder that the impression is that the banks have once again outwitted their regulators.
The decision by the 27 bodies that make up the Basel committee to give banks a further four years to build up their liquidity buffers – and count more types of assets as “liquid” – comes after months of lobbying.
From the outset banks had complained that being asked to build up a pot of assets that are so easy to sell that it would allow the bank to survive for a 30-day credit crunch would restrict their ability to lend to households and businesses. Four years on, the banks will now no longer need to meet new rules by 2015 but have instead been given the same 2019 deadline set by the Basel regulators for separate requirements to hold more capital.
The rules were devised with events such as the run on Northern Rock in mind; the bank ran out of ways to fund itself (although the problem was also due to capital levels). Global regulators will argue they are being pragmatic, and as outgoing governor of the Bank of England Sir Mervyn King put it on Sunday night, there are now rules for the first time on how much and what type of liquid instruments can be held.
The reality is that economies were not expected to be this fragile five years after the run on the Rock.
The UK could be heading for an unprecedented triple-dip recession and bank lending remains stubbornly low, despite data from the Bank of England last week appearing to indicate that banks are getting ready to lend again. The question that persists is whether lending is low because businesses and households are too nervous to borrow or whether banks are making it too difficult. The regulators are at least doing their bit to kill any argument by the banks that it is regulations that are stopping them lending.
Even before this latest climbdown, the Financial Policy Committee inside the Bank of England that King chairs had been mulling since the summer relaxing the liquidity rules because of concerns about the economy. But the stock market reaction says it all: bank shares topped the FTSE 100 leaderboard on Monday.
Whether the rally is sustained will depend on the outcome of the “honest and open statement” of bank balance sheets currently being carried out by the FSA – another test of whether regulators will hold a hard line in the face of an ailing economy.
The coalition’s implementation of the Vickers reforms – to erect a ringfence around retail and investment banking operations, again by 2019 – will also demonstrate whether policymakers are determined to crack down on banks.