Mark Carney facing his first problem

 
Mark Carney The Treasury believes Mark Carney needs a few allies around him

Here are two moderately interesting, related facts (I have really sold this piece to you, haven't I).

First: reliable sources tell me (ahem) that the replacement for Paul Tucker as deputy governor of the Bank of England will be an outsider, and will not come from the Bank's ranks;

Second: The Treasury and 10 Downing Street are concerned that the banks were ambushed in June by the regulator, the Prudential Regulation Authority, with the unexpected imposition of a new constraint on how much they can lend relative to their shock-absorbing capital, or what is known as a leverage ratio.

Now to be clear, it was the surprisingly early implementation of the leverage ratio, not the fact of it, that upset members of the government and Whitehall.

The point is that the Treasury believes that banks have to be set clear and stable rules about how they are to be judged, and then properly held to account for their behaviour - especially whether they are supporting the economy by providing adequate credit and conducting themselves in a respectable way.

But if the regulator keeps moving the goalposts for the banks, especially on something as important as how much capital they have to hold as protection against future losses, then it is perhaps understandable when banks' boards are a bit confused about what is expected of them.

In the case of the leverage ratio, the banks had no idea it was coming their way until a few days before the end of a review of how much capital they need to hold as measured by another set of rules, the notorious Pillar 1 Basel rules. (Please don't lose the will to live at this juncture; probably all you need to know about Pillar 1 Basel is that it is fiendishly complicated and that banks' cynical exploitation of its earlier version is blamed by many for the banking crisis of six years ago).

Needs allies

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As I understand it, the PRA's chief executive, Andrew Bailey, has told colleagues that neither Barclays or Nationwide will be allowed to shrink their creation of credit.”

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Anyway, the link between my two mildly diverting statements above is the Treasury's firm belief that the Bank of England needs a thorough culture overhaul, so that it doesn't feel tempted to re-write the obligations they place on banks in a way that can be seen as capricious and unpredictable.

It was precisely to change the way the Bank thinks and acts that George Osborne airlifted Mark Carney from Canada's central bank to be the new governor of the Bank of England.

The Chancellor was intent that Mervyn King's replacement had to be a proper new broom, which is why all the candidates for that top job bar Carney were no-hopers.

As I understand it, the Treasury now believes Mr Carney is in need of allies around him who are not Bank of England lifers.

Who therefore is currently the leading candidate to become deputy governor? Well the name that has repeatedly been touted to me is that of a Treasury lifer (don't smirk), Tom Scholar, who is what's known as a Second Permanent Secretary at that most powerful of Whitehall departments and who played an influential role in the bail out of RBS and HBOS in 2008.

What you need to know is that the Bank of England and the Prudential Regulation Authority are formally independent of government, in an operational sense, which is why it is so important for the Chancellor that he chooses the very top people at the Bank of England.

No overjoyed

And another thing.

As I mentioned a few days ago, the new insistence that banks should have a 3% ratio of capital to gross assets (loans and investments) is particularly bothersome for two financial institutions, Nationwide and Barclays, who are not in the naughty corner in respect of supporting the UK's tepid economic recovery.

On the PRA's calculations, Nationwide's current leverage ratio is 2% and Barclays is 2.5%, significantly below the new 3% minimum.

For Nationwide and Barclays to hit the 3% leverage target, they would either have to raise expensive new capital, which would squeeze their profits, dispose of non-core assets, or shrink their lending.

Neither bank is overjoyed about any of this, and feel hard done by, in having done what the government wants by increasing their net lending to households and businesses.

What is more, it is particularly unclear how the new capital requirement will be met by Nationwide without to an extent restricting the supply of new mortgages or at least pushing up the cost of mortgages - because, unlike Barclays, it is a mutual with few obviously spare assets to sell and no access to the stock market for capital.

Nationwide may be able to raise up to £2bn by selling "hybrid capital" to investors - or debt that behaves like shares - but this capital is pretty expensive, so issuing it would increase Nationwide's costs and restrict the building society's ability to provide cheap mortgages

As for the chief executive of Barclays, Antony Jenkins, he had the temerity to express his frustration at a conference on Friday, when he muttered about the possibility of Barclays reining in the volume of loans it provides.

This has mightily miffed the PRA.

Defuse the tension?

As I understand it, the PRA's chief executive, Andrew Bailey, has told colleagues that neither Barclays or Nationwide will be allowed to shrink their creation of credit.

A PRA source told me that it would force them to keep lending, and would not accept any plan from them for hitting the leverage ratio that includes a reduction in lending.

If in practice they did shrink lending, the PRA would lambast them in public and even - possibly - fine them, said an insider.

Chances are we will hear precisely what Mr Bailey thinks about all this, when he is grilled by MPs on the Treasury select committee on Tuesday.

As for Mr Carney, how can he defuse all this tension? Well he could set the deadline for the new leverage ratio as the end of 2014, rather than the end of this year.

Given that he has swanked about how Canada's banks survived the great crisis of 2008 in better shape than most others thanks to a leverage ratio less onerous than the Bank of England's new one, it would not be a great surprise if he opted for delay in Britain.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 180.

    So go to the unanswered question behind all of this. Just what size is too big to fail, the root of the current situation. Its not answered because its gobbleygook. Banks are networked systematically so it doesnt matter what size they are made, they are all assimilated on the same model. That is the true horror. Theres no escape. The only tool is inflation & it will be embraced. The rest is panto

  • rate this
    0

    Comment number 179.

    #178. John_from_Hendon

    "Rescue banks = kill the economy!"

    Agreed. But the whole point of the country is to support and nurture the banks and their owners, hangers on.

    The banks are it.

    The banks don't care about the economy. Only that they fill their grubby hands.

  • rate this
    +1

    Comment number 178.

    Is it economically rational to save the banks?

    No one has dared to answer this question!

    I think it is not a good use of funds to rescue the un-rescuable. We will do better to set up new untainted banks - and as gracefully as possible wind down the wreckage of the stupidity of the last decades & admit the whole idea of zero-regulation was wrong from the start.

    Rescue banks = kill the economy!

  • rate this
    0

    Comment number 177.

    So what you are saying Robert is that the job he has landed is his first "real" job.

    Not that I believe that any job in banking can ever be construed as real.

    Rather that he will have to raise his game for the first time.
    He has had shoo-ins previously.

    Why is it that the UK always picks them?
    Silly question. We pick them in order to bail them out.
    It's what the bankers expect.
    And they get..

  • rate this
    +1

    Comment number 176.

    Isn't it rather shocking when you point out that the King is starkers to be CENSORED!

    Guys, hiding the truth does not change the reality.

    If, or when, the EU gets round to fining the co-conspirators over CDSs at the rate of 10% of their TURNOVER (~10tn Euro) then the major banks are left with no capital at all - they are well & truly & irrecoverably bust!

    Hiding the truth does not change it!

  • rate this
    0

    Comment number 175.

    The question Mr. Carney should be asking is...

    Is our banks fit for purpose.?

    "What is says on the tin"... means if it isn't what it says on the tin then it is fraud...pure and simple.

    If a bank doesn't "bank" then it isn't what it says on the tin and is fraud.

    Empty vaults is fraud.
    Bust banks is fraud.
    Highly leveraged banks is fraud.
    There are many goings on in banks which may be fraud.

  • rate this
    0

    Comment number 174.

    Have they decided whose face is going to go on the One Million Pound Note yet ?
    I'm only curious because I don't want to lose my appetite before I buy a Happy Meal.

  • rate this
    +1

    Comment number 173.

    I seem to recall that several other former Treasury worthies have been parachuted into the bank of England from time to time in recent memory. have any of them (a) done anything to "change the culture" or (b) helped to improve financial regulation or management of the economy in any notable way? I'm sure Mr Scholar is a splendid chap, but what experience does he have of "changing culture"?

  • rate this
    +1

    Comment number 172.

    At some point,in the far distant future,someone will, publish a list of British Millionaires who made a fortune,thanks to Public Money.
    But please do not expect that list any time soon.

  • rate this
    +1

    Comment number 171.

    Even now it seems nobody is in charge. How about a culture change throughout government - sort the banks out once and for all. Make a decision for a change!

    The banks want some clear guidance and so does the public. For as long as all these serving men contradict each other nothing is going to get better.

  • rate this
    0

    Comment number 170.

    @169
    It is precisely this type of attitude which has led us to the state we are in.
    Heaven help us.

  • rate this
    0

    Comment number 169.

    you can spend only what you save and remain a virgin living at your parents. or get a bank to trust in your long term earning ability enough to lend you a mortgage so you can buy a house, shop whatever. Get marrried, raise future taxpayers live happilly ever after etc. Unless we move to pure communism/state provision, credit is essential for economic activity.

  • rate this
    0

    Comment number 168.

    @167
    the credit we remain addicted to
    /
    and to what purpose.
    Why not save?

  • rate this
    +1

    Comment number 167.

    162. they can be overzealous - eg US FED in 19 jacked up interest rate to kill leverage and speculation wost stock market crash. Arguably this exacerbated the ensuing slump.
    Likewise, telling banks to put away huge abouts of capital (leverage ratio, capital adequacy directive etc) will also result in them refusing to create the credit we remain addicted to.

  • rate this
    +1

    Comment number 166.

    153.t_01

    "What has a firewall got to do with it?"

    If taxpayers are to make guarantees on deposits, then there is no need to also bail out the non-productive but liquid traders. Same holds regardless of which type of banking is riskier.

    I didn't mention casinos. Just pragmatic management of the financial sector.

  • rate this
    +2

    Comment number 165.

    Certain posters persist in asserting banks' absolute right to run their businesses as if they were just like ordinary businesses. They're not. Because they're "TBTF" banks alone are cushioned by the rest of us against the penalties for recklessness which a normal business faces. This fact alone justifies any amount of regulatory intervention.

    Meanwhile, the gravy-train just keep rolling on.

  • rate this
    0

    Comment number 164.

    @162.torpare

    Regulators set the envelopes within which banks can operate. It is then up to the banks to decide on their particular mix of assets (Asset mix is also regulated, by the way)

    Barclays is, rather understandably, miffed because they had agreed on the timetable for leverage (2018) and then were told "how about in 6 months".

  • rate this
    0

    Comment number 163.

    My #162 ought to have been addressed to treacle_01 as well as or instead of to T.I.F. Apologies to both.

  • rate this
    0

    Comment number 162.

    #159. T.I.F.

    OK, I jumped in both feet first. Thanks for correcting me.

    But is it not the case that a regulator whose job is to enforce prudential governance must be able to prescribe the mix not just quantum of banks' reserves? If banks then are permitted to respond just by shrinking their lending then they in effect can trump the regulator's efforts at will. Which was where we came in...

  • rate this
    0

    Comment number 161.

    @159.The Invisible Finger
    30 Minutes ago
    145. torpare. 3% is only tier1. There are further requirements for additional capital, esp for systemically important institutions etc. In fact the bank of england has mooted 20% as a long term goal.

    ---

    You are confusing leverage ratios with capital adequacy ratios.

 

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