Capital Requirements for Banks Hotly Debated<\/p>\n
Ben Chu writes: \u00a0A senior official at the Bank of England has been accused of misleading the public about the safety of UK banks.<\/p>\n
He cited Bank of England estimates that a 1 percentage point increase in capital requirements across the board could knock around 0.6 per cent off GDP. \u201cThe costs will be borne by real borrowers in higher costs of funds and real savers in lower returns,\u201d he warned. But Mr Brazier\u2019s remarks drew a strong rebuttal from Professor Anat Admati of Stanford University, a widely acknowledged expert on the banking sector.<\/p>\n
\u201cI am alarmed by Mr Brazier\u2019s speech because it confirms that important policy regarding financial stability is based on flawed claims and flawed research,\u201d she said.<\/p>\n
Ms Admati rejected the Bank\u2019s estimate of the wider economic cost of banks using\u00a0more capital and said\u00a0one reason banks might find it more expensive to fund their balance sheets with more equity and less debt was because their de facto public subsidies\u00a0from the taxpayer, such as being “too\u00a0big to fail” and the tax deductability of debt,\u00a0would have been eroded.<\/p>\n
\u201cIt is disturbing that the Bank\u2019s head of financial stability seems to be more concerned with supporting the banks by making flawed assertions that contradict fundamental principles of corporate funding,\u201d she said.<\/p>\n
The row comes at a time when the Bank is under serious pressure to reconsider its capital rules.\u00a0The position of Mr Brazier, who was appointed to his current position last year, seems to be in line with those of the Bank\u2019s Governor, Mark Carney.\u00a0Mr Carney has repeatedly sought to assure bankers that there will be no additional capital requirements made on them in the coming years. Referring to the international \u201cBasel\u201d agreements on capital standards sealed in 2011, Mr Carney insisted in Shanghai last month: \u201cThere will be no Basel IV\u201d.<\/p>\n
In his new book The Age of Alchemy<\/em><\/a>, Lord King takes a tough line on capital, saying it would be \u201ca good start\u201d for banks to have a minimum ratio of equity to total assets of 10 per cent. The Bank is currently planning to require them to have equity worth only between 3 and 4 per cent of total assets. For her part, Ms Admati says banks should have 20 per cent buffers.<\/p>\n \u201cTheir hatred of equity only confirms that the subsidies are substantial to their business model \u2013 but the subsidies come from the public,\u201d said Ms Admati.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" Capital Requirements for Banks Hotly Debated Ben Chu writes: \u00a0A senior official at the Bank of England has been accused of misleading the public about the safety of UK banks. Alex Brazier, the Bank\u2019s executive director of financial stability,\u00a0rejected calls … Continue reading