New [BOE] governor Mark Carney has already made changes. In a statement accompanying the widely-expected decision to leave both rates and asset purchases unchanged, the BoE said that rising market rates had shifted expectations for the Bank Rate above levels that were justified by the economic situation.
The fact that there was a statement at all indicated a change in policy. The old BOE just announced its decision and left interpretation to the markets.
This was a clear attempt to talk the markets down and it worked.
Margot Patrick at WSJ reports that the Bank of England is enforcing a new “leverage ratio” rule:
Top U.K. banks regulator Andrew Bailey told lawmakers that the requirement for banks to hold at least 3% equity against total assets “is a sensible minimum,” and that those who fall short must act quickly, but without cutting their lending to households and businesses.
The Bank of England’s Prudential Regulation Authority on June 20 said Barclays and mutual lender Nationwide Building Society don’t meet the standard and gave them 10 days to submit plans for achieving it.
I hope that their Australian counterpart APRA are following developments closely. Both UK and Australian banks are particularly vulnerable because of their over-priced housing markets. And while the big four Australian banks’ capital ratios appear comfortably above 10 percent, these rely on risk-weightings of 15% to 20% for residential mortgages.
Only when the tide goes out do you discover who’s been swimming naked. ~ Warren Buffett
Read more at BOE: Barclays, Nationwide Must Boost Capital – WSJ.com.
Anne-Sylvaine Chassany at FT writes of the UK’s Prudential Regulation Authority:
The PRA irked banks when it included a 3 per cent leverage ratio target in its assessment of UK lenders’ capital health. It identified shortfalls at Barclays and Nationwide, the UK’s largest building society, which have projected leverage ratios of 2.5 per cent and 2 per cent respectively under PRA tests.
Outrageous isn’t it? That banks should be asked to maintain a minimum share capital of three percent against their lending exposure — to protect the British taxpayer from future bailouts. My view is that the bar should be set at 5 percent, although this would have to be phased-in over an extended period to prevent disruption.
I hope that APRA is following developments closely. The big four Australian banks are also likely to be caught a little short.
Read more at Barclays’ threat on lending under fire – FT.com.
This comment by Tim Congdon (International Monetary Research Ltd) on the UK shadow Monetary Policy Committee refers to the “regulatory blight” on banking systems as regulators switch from risk-weighted capital ratio requirements to a straight-forward, unweighted leverage ratio which requires some banks to raise more capital. What he fails to consider is that risk-weighting has contributed to the current parlous state of our banking system. Under risk-weighting, banks concentrated their assets in classes with low risk-weighting, such as residential mortgages and sovereign government bonds, where they were required to hold less capital and could achieve higher leveraged returns. The combined effect of all banks acting in a similar manner achieved a vast concentration of investment exposure in these asset classes, with the undesirable consequence that the underlying risk associated with these asset classes soared, leading to widespread instability across the banking system and fueling both the sub-prime and Euro zone sovereign debt crisis.
My last note for the SMPC opened with the sentence, ‘The regulatory blight on banking systems continues in all the world’s so-called “advanced” economies, which means for these purposes all nations that belong to the Bank for International Settlements.’ As I explained in the next sentence, the growth of banks’ risk assets is constrained by official demands for more capital relative to assets, for more liquid and low-risk assets in asset totals, and for less reliance on supposedly unstable funding (i.e., wholesale/inter-bank funding). The slow growth of bank assets has inevitably meant, on the other side of the balance sheet, slow growth of the bank deposits that constitute most of the quantity of money, broadly-defined. Indeed, there have even been periods of a few quarters in more than one country since 2007 in which the assets of banks, and hence the quantity of money, have contracted.
The equilibrium levels of national income and wealth are functions of the quantity of money. The regulatory blight in banking systems has therefore been the dominant cause of the sluggish growth rates of nominal gross domestic products, across the advanced-country world, that have characterised the Great Recession and the immediately subsequent years. Indeed, the five years to the end of 2012 saw the lowest increases – and in the Japanese and Italian cases actual decreases – in nominal GDP in the G-7 leading industrialised countries for any half-decade since the 1930s.
It is almost beyond imagination that – after the experience of recent years – officialdom should still be experimenting with different approaches to bank regulation and indeed contemplating an intensification of such regulation. Nevertheless, that is what is happening. The source of the trouble seems to be a paper given at the Jackson Hole conference of central bankers, in August 2012, by Andy Haldane, executive director for financial stability at the Bank of England. The paper, called The Dog and the Frisbee, argued that a simple leverage ratio (i.e., the ratio of banks’ assets to capital, without any adjustment for the different risks of different assets) had been a better pointer to bank failure than risk-weighted capital calculations of the kind blessed by the Basle rules. The suggestion is therefore that the Basle methods of calculating capital adequacy should be replaced by, or complemented by, a simple leverage ratio.
For banks that have spent the last five years increasing the ratio of safe assets to total assets, or that have always had a high proportion of safe assets to total assets, the potential introduction of a leverage ratio is infuriating. A number of banks have been told in recent weeks that they must raise yet more capital. Because it is subject to the new leverage ratio, Nationwide Building Society has been deemed to be £2 billion short of capital. That has upset its corporate plans, to say the least of the matter, and put the kibosh on significant expansion of its mortgage assets. And what does one say about George Osborne’s ‘Help to Buy’ scheme, announced with such fanfare in the last Budget and supposed to turbocharge the UK housing finance market?
The leverage ratio has been called Mervyn King’s ‘last hurrah’, since there can be little doubt that King has been the prime mover in the regulatory tightening that has hit British banking since mid-2007. He is soon to be replaced by Mark Carney, who may or may not have a different attitude. Carney has been publicly critical of Haldane and his ‘Dog and Frisbee’ paper, but that does not guarantee an early shift in the official stance. Indeed, it is striking that – of the bank’s top team under King – only Paul Tucker, generally (and correctly) regarded as more bank-friendly than King or Haldane, has announced that he is leaving the Bank once Carney has taken over.
My verdict is that the regulatory blight on UK banking is very much still at work. Further, without QE, the quantity of money would be more or less static. As before, I am in favour of no change in sterling interest rates and the continuation of QE at a sufficiently high level to ensure that broad money growth (on the M4ex measures) runs at an annual rate of between 3% and 5%. My bias – at least for the next three months – is for ‘no change’. It is plausible that I will be advocating higher interest rates in 2014. However, much depends on a realisation in official quarters that overregulation of the banks is, almost everywhere in the advanced world, the dominant explanation for the sluggishness of money supply growth and, hence, the key factor holding back a stronger recovery. Major changes in personnel may be in prospect at the Bank of England now that Mervyn King is leaving, but the Treasury – which I understand from private information will be glad to see the back of him – has failed to prevent the growth of a regulatory bureaucracy led by King appointees.
If having a well-capitalized banking system requires some “regulatory blight” then lets have more of it. Three cheers for Mervyn King and the (un-weighted) leverage ratio. Let’s hope that Mark Carney follows a similar path.
via David Smith’s EconomicsUK.com: IEA’s shadow MPC votes 5-4 for quarter-point rate hike.
Sterling is headed for a test of primary support at $1.53* after completing a double top. Oscillation of 63-day Twiggs Momentum in a similar range to the last year would indicate a ranging market in the longer term — between $1.53 and $1.63.
* Target calculation: 1.58 – ( 1.63 – 1.58 ) = 1.53
Gavyn Davies writes on BOE governor Mervyn King’s UK economic policy speech on Tuesday in FT Blogs:
The governor gives an extremely broad hint that he would like sterling to be much lower against other currencies. In his view, the drop of 25 per cent in sterling, which happened between late 2007 and the beginning of 2009, was “certainly necessary” for a full rebalancing of the UK economy.
If we take a look at the long-term view, sterling is ranging in a narrow band against the greenback after a sharp fall in 2008. 63-day Twiggs Momentum oscillating close to the zero line (within 5%) is typical of a ranging market.
Completion of a double top on the weekly chart signals a down-swing to primary support at $1.53*. 63-day Twiggs Momentum below zero strengthens the signal.
* Target calculation: 1.58 – ( 1.63 – 1.58 ) = 1.53
Claire Jones reports that Mark Carney says central banks should consider scrapping inflation targets and target nominal GDP instead — allowing more aggressive measures during a down-turn.
[Mark Carney, next governor of the Bank of England] suggested that a nominal GDP target, where a central bank sets monetary policy based on both inflation and growth, would do more to boost economic output. “For example, adopting a nominal GDP-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting,” he said.
Read more at Carney broaches dumping inflation target – FT.com.
Mark Carney, who currently runs Canada’s central bank, will be the next governor of the Bank of England, the British government announced Monday, in a surprise pick that underscores U.K. officials’ thirst for fresh blood at the powerful institution……
Chancellor of the Exchequer George Osborne and Bank of England Gov. Mervyn King announced plans to flood banks with cheap funds in a dual attempt to jump-start lending to British households and businesses and to fend off potential financial problems at big U.K. lenders. The programs resemble some of the emergency measures enacted by central banks in Europe and the U.S. during peak crisis periods in recent years.
[BOE Governor Mervyn King] kept the door open for more stimulus in his speech Tuesday. “With inflation falling back and wage growth subdued, there is scope for interest rates to remain low and, if necessary, for further asset purchases, to prevent inflation falling below the 2% target,” he said. The annual rate of inflation in the U.K. dipped to 4.2% in December from 4.8% a month earlier, and is expected to slow sharply this year.
So where once investors worried that it [the Bank of England] had got policy plain wrong, there’s now a chance they’ll start to fear that the bank has got things all too right, after all, and that the U.K. really does need policy settings appropriate for an economic ice age……
And a government focused on austerity measures is in no position to offer fiscal support even if it wanted to, and, according to the treasury’s pronouncements, it doesn’t. It’s sticking with the deficit-cutting plan A, come what may.
So this is clearly an economy with huge problems anywhere you might care to look. Its remaining cardinal virtue, perhaps, is that it isn’t in the euro zone, so the bloc’s more pressing concerns have shielded it from harsher scrutiny. It can’t rely on that shield for all time.
The Bank of England said Thursday it will buy £75 billion of government bonds in a fresh bout of quantitative easing aimed at stimulating the U.K.’s stagnant economy.
….The decision sent sterling sharply lower. The pound plummeted to a 15-month low against the dollar, trading at $1.5286 from $1.5459 before the decision. Prices for government bonds surged.