Ben Chu: How George Osborne threw our guardian angel overboard

No one has been better than Robert Jenkins at explaining the mechanics of banking to a lay audience

I’m going to write today about your guardian angel. The chances are you’ve never heard of him but he’s worked courageously these past two years to protect your living standards and quite possibly even your job. His name is Robert Jenkins and he’s been an external member of the Bank of England’s banking watchdog, the Financial Policy Committee (FPC).

Since July 2011 Mr Jenkins has made it his purpose in life to get our largest banks to build up their safety buffers, also known as their capital. Recall that the last time our big lenders slashed those buffers to thin cushions they crashed the entire economy and required a £1 trillion public bailout to prevent even worse damage occurring. We’re all still suffering from the effects of that meltdown, as the longest squeeze on living standards since the 1920s stretches on.

There is a reminder of what went wrong in 2008 in the Banking Commission’s latest report, which focuses on the failure of HBOS. It is a tale of a once prudent bank destroyed by reckless and greedy individuals, whose behaviour was abetted by incompetent and spineless regulators.

The trouble is that we seem to be fighting a national surge of amnesia brought on by people who seem to want us to forget that gruesome history. A host of commentators over the past week have suggested that the FPC’s recent instruction to our largest banks to increase their capital buffers by £25bn by the end of the year will mean that they can’t lend as much as they otherwise would to businesses. This is presented as a grotesque blunder by regulators that will harm the real economy and retard the recovery. “Every pound of extra capital the banks are told to raise is a pound less to be lent to small firms,” said one business editor of a national newspaper in a depressingly typical response.

There are two explanations for such statements. The more charitable one is that they are based on a profound ignorance of the mechanics of banking by people who have been brainwashed into seeing the world through the eyes of the banking industry. The less charitable one is that they are prompted by an intention to mislead.

Let’s go back to first principles. There are two sides to a bank’s balance sheet. On one side are their assets, the loans and investments the banks make. On the other side are their liabilities, the money they borrow to fund the bank’s loans and investments. And also their equity capital buffer.

It is important to note that while it is in the interests of taxpayers for banks to have big capital buffers, it is in the interests of bank managers to run their businesses on as low a level of equity capital as possible. This is because their bonuses are linked to their institutions’ “return on equity”. For a given level of profit, the smaller the equity, the bigger the return on that equity. And hence the larger the bonus.

Those who complain about instructions for banks to raise more capital imply that equity capital is a pot of money that sits idle on its balance sheet, when that money could otherwise be used for to finance new loans. The briefest consideration of the balance sheet described above shows that this is nonsense. Capital exists on the liability side of a bank’s balance sheet, not the assets side. It doesn’t crowd out lending.

The only way the FPC’s injunction could result in banks reducing their loans to the real economy is if their management attempted to keep their levels of capital constant and instead to increase their capital ratio by shrinking the asset side of their balance sheet. But this is something that the banks have been explicitly instructed not to do by the FPC. So those people who are citing this as a danger are effectively arguing that the banks will disobey their own regulator and hurt the economy to protect their own pay packets. If these people truly believe this is the likely outcome, it is curious that they regard the regulator, rather than the banks, as the appropriate target of their vituperation.

Now consider the wider economic benefits of higher capital levels beyond conferring upon our banks a more significant safety buffer. The reality is that far from undermining bank lending to the real economy, more capital will support it. The banks that have experienced the sharpest rise in their own borrowing costs since the 2008 financial crisis are those with the most meagre levels of capital. Similarly, the banks that have the worst records of lending to businesses since 2008 are those with the thinnest capital levels. This is no mystery. Investors regard under-capitalised banks as more likely to stumble and make losses. Banks with more capital are more likely to thrive. All the evidence suggests that if the banks raised bigger capital buffers they would see their borrowing costs fall and they would then be able to lend more to hard-pressed small firms.

Which brings us back to Robert Jenkins. No one on the Financial Policy Committee has been better at explaining the mechanics of the banking balance sheet to a lay audience. No one has been more insistent on the necessity of going beyond the minimum international capital standards set by the Basel committee for the sake of protecting British taxpayers. No one, save perhaps the outgoing Governor, Sir Mervyn King, has generated more hostility from the banking lobby for pointing out the simple truth of how our economy is being held hostage by the greed of a small number of reckless bankers.

But this tale does not have a happy ending, I’m afraid. Robert Jenkins, your guardian angel, was removed from the Financial Policy Committee by the Chancellor of the Exchequer, George Osborne, last week. I have learnt that Mr Jenkins applied to serve another term on the FPC but was rejected by a Treasury which was, apparently, keen to minimise the chances of the committee imposing any more troublesome capital demands on our big banks.

Our Chancellor decided that the banking lobby knew better than Mr Jenkins about how to safeguard taxpayers and how to promote lending. Draw your own conclusions about whether your living standards are any safer as a result. I know I, for one, won’t be sleeping any sounder.

PROMOTED VIDEO
Sport
Mario Balotelli pictured in the win over QPR
footballInternet reacts to miss shocker for Liverpool striker
Voices
Sol Campbell near his home in Chelsea
voices
News
Kimi the fox cub
newsBurberry under fire from animal rights group - and their star, Kimi
Arts and Entertainment
Ella Henderson's first studio album has gone straight to the top of the charts
music
News
<p>Jonathan Ross</p>
<p>Jonathan Ross (or Wossy, as he’s affectionately known) has been on television and radio for an extraordinarily long time, working on a seat in the pantheon of British presenters. Hosting Friday Night with Jonathan Ross for nine years, Ross has been in everything from the video game Fable to Phineas and Ferb. So it’s probably not so surprising that Ross studied at Southampton College of Art (since rebranded Southampton Solent), a university known nowadays for its media production courses.</p>
<p>However, after leaving Solent, Ross studied History at the School of Slavonic and East European Studies, now part of the UCL, a move that was somewhat out of keeping with the rest of his career. Ross was made a fellow of the school in 2006 in recognition of his services to broadcasting.</p>
TV

Rumours that the star wants to move on to pastures new

Life and Style
fashion
News
Paul Nuttall, left, is seen as one of Ukip's key weapons in selling the party to the North of England
i100
Arts and Entertainment
Russell Brand labelled 'left-wing commie scum' by Fox News
TV
Arts and Entertainment
BBC's Antiques Roadshow uncovers a TIE fighter pilot helmet from the 1977 Star Wars film, valuing it at £50,000
TV

TV presenter Fiona Bruce seemed a bit startled by the find during the filming of Antiques Roadshow

News
people

Comedian says he 'never laughed as hard as I have writing with Rik'

News
ebooksAn unforgettable anthology of contemporary reportage
Sport
Steven Caulker of QPR scores an own goal during the Barclays Premier League match between Queens Park Rangers and Liverpool
football
Arts and Entertainment
artKaren Wright tours the fair and wishes she had £11m to spare
News
i100
Life and Style
Kirsty Wark and Camila Batmanghelidjh been invited to take part in Women Fashion Power, a new exhibition that celebrates the way women's fashion has changed in relation to their growing power and equality over the past 150 years
fashionKirsty and Camila swap secrets about how to dress for success
Arts and Entertainment
Joy Division photographed around Waterloo Road, Stockport, near Strawberry Studios. The band are Bernard Sumner (guitar and keyboards), Stephen Morris (drums and percussion), Ian Curtis (vocals and occasional guitar), Peter Hook (bass guitar and backing vocals).
booksNew book on Ian Curtis sheds fresh light on the life of the late singer
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Project Coordinator - 12 month contract

£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

IT Operations Manager - London - £55,000

£50000 - £55000 per annum + bonus + benefits: Ashdown Group: IT Relationship M...

Banking Solicitor NQ+

Highly Attractive Salary : Austen Lloyd: NOTTINGHAM - BRILLIANT FIRM - You wil...

Day In a Page

Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

How We Met: Hugh Bonneville & Peter James

'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

Bill Granger's heavenly crab recipes

Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
Radamel Falcao: How faith and love drive the Colombian to glory

Radamel Falcao: How faith and love drive the Colombian to glory

After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

Terry Venables column

Premier League managers must not be allowed to dictate who plays and who does not play for England
The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

Michael Calvin's Inside Word

Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past