Tag: Bank of England

ANZ chief executive Mike Smith is the latest banker to warn that the push to increase bank capital ratios will reduce access to bank finance. The AFR reports Smith as saying:

It is not just about banks, it is about the real economy – about corporations, business and individuals… It is one thing for a bank to ­complain about regulation but it is another thing for a corporation to say we are not getting finance because of this regulation that is being imposed on the banks.

Methinks bank resistance to increased capital requirements is more about protecting bonuses than about protecting shareholders or the broad economy. Shareholders would benefit from lower funding costs and improved stock ratings associated with a stronger balance sheet, while Bank of England’s Andrew Bailey had this to say about the impact of stronger capital ratios on bank lending:

I do however accept that there remains a perception in some quarters that higher capital standards are bad for lending and thus for a sustained economic recovery…… Looking at the broader picture, the post-crisis adjustment of the capital adequacy standard is a welcome and necessary correction of the excessively lax underwriting and pricing of risk which caused the build up of fragility in the banking system and led to the crisis. I do not however accept the view that raising capital standards damages lending. There are few, if any, banks that have been weakened as a result of raising capital.

Analysis by the Bank for International Settlements indicates that in the post crisis period banks with higher capital ratios have experienced higher asset and loan growth. Other work by the BIS also shows a positive relationship between bank capitalisation and lending growth, and that the impact of higher capital levels on lending may be especially significant during a stress period. IMF analysis indicates that banks with stronger core capital are less likely to reduce certain types of lending when impacted by an adverse funding shock. And our own analysis indicates that banks with larger capital buffers tend to reduce lending less when faced with an increase in capital requirements. These banks are less likely to cut lending aggressively in response to a shock. These empirical results are intuitive and accord with our supervisory experience, namely that a weakly capitalised bank is not in a position to expand its lending. Higher quality capital and larger capital buffers are critical to bank resilience – delivering a more stable system both through lower sensitivity of lending behaviour to shocks and reducing the probability of failure and with it the risk of dramatic shifts in lending behaviour.

The BOE and BIS tell us that higher capital ratios will improve bank lending, yet Mr Smith is trying to scare regulators with threats that it will have the opposite effect.

Read more at Andrew Bailey: The capital adequacy of banks – today’s issues and what we have learned from the past | BIS.

And at ANZ CEO Mike Smith Rebuffs Murray Inquiry Call For More Bank Capital | Business Insider.