Toxic atmosphere surrounding banks and regulators intensifies


Clive Horwood
Published on:

The relationship between the banks and their regulators becomes more fraught "as the well-capitalized, liquid, well-funded UK banking system continues to shrink"

In the UK, the atmosphere between banks and their regulators has grown quite poisonous.

The UK government abandoned the chief executive of RBS Stephen Hester, a man recruited to clear up other people's mess, when the bank’s board dared to grant him a portion of the pay due under a compensation plan voted through by shareholders, including the government itself.

Many UK bankers are still bridling at a widely reported speech by Robert Jenkins, a member of the Bank of England's (BoE)  Financial Policy Committee (FPC), in November, in which he accused those who responded to reduced availability and higher cost of capital and funding by reducing their lending to the real economy of indulging in a lobbying tactic against prudential regulation that is “intellectually dishonest and potentially damaging”.

Bankers’ social standing and reputation have been so damaged by the financial crisis that probably only journalists are more despised. So it’s still interesting to see what exception they take to being branded liars. Neither do they accept the lectures from various figures at the BoE, such as from governor Mervyn King, that they can easily withhold dividends from shareholders and still raise more equity capital rather than reduce assets.

Again, as with the European Banking Authority's blessing of European banks’ weedy capital-raising efforts, the BoE seems chiefly intent now on avoiding any blame for the consequences of higher regulatory burdens on banks than it is interested in adjusting the balance of regulation between banking stability and promoting lending.

In a note last month, UBS bank equity analysts Alastair Ryan and John-Paul Crutchley suggested that hostile regulation is undermining investors’ confidence in UK banks.

“As the well-capitalized, liquid, well-funded UK banking system continues to shrink, taking economic growth with it, the authorities are disclaiming ever-louder their role in this outcome," says Ryan and Crutchley. "One Monetary Policy Committee member wondered whether the problem, in part, was that bankers had become 'reluctant, risk-averse jerks'. The Bank of England governor has suggested it is predominantly the euro crisis. The FPC has pointed to banks’ dividend and bonus payouts as the culprits. We don’t believe these address the heart of the problem.”
They continue: “All the listed UK banks could be compliant with all the announced regulatory requirements while growing lending and paying dividends. But the ever-expanding regulatory agenda must be met with a banking system behaving as if current requirements will be raised. The UK banks would be lending more, and funding more cheaply, if they and their share- and bondholders had confidence that today’s agenda was substantially complete.”

While the UBS analysts suggest that “one would reasonably expect signs of impending forbearance to be evident” by now, in reviewing recent speeches from UK regulators, “only an inveterate optimist could see any signs thus far”.

Their note hints that the BoE might impose an even more conservative leverage ratio than previously discussed and raises concerns that UK banks cannot be certain that the required ratio of permanent loss-absorbing capital has reached its maximum among others.

The equity analysts also point out that paying dividends to shareholders is not so easily abandoned by companies trading below book value with limited prospect of earnings growth.

While Jenkins accuses them of malignly raising the return on equity metric as a key to performance-related pay, the UBS analysts point out: “Pension funds cannot own a security with no yield, no growth and no prospects of either. Rather than recapitalizing the banking system, the rational shareholder demand is now for it to be decapitalized. This expectation by the owners of the companies is a key determinant of the banks’ behaviours. But the pressure [from the Bank of England] for further capital remains.”

For more on this issue, check out the March edition of Euromoney magazine