David Prosser: Governor's call for banks to raise capital ratios can only be bad news for businesses
Outlook Having spent Tuesday promoting an Autumn Statement full of schemes to promote lending to small and medium-sized businesses, George Osborne can't have been too pleased to read yesterday's Financial Stability Report from the Bank of England. It was full of reasons for the banks to lend less rather than more.
OK, that's not what Sir Mervyn King, the Bank's Governor, actually said. Quite the opposite, in fact – he explained that while banks did need to build up capital in the face of the eurozone crisis, they should do so by showing restraint on bonuses and dividends, rather than reducing lending.
To which one can only say, best of luck with that. For Sir Mervyn knows better than most that this is not how the City operates.
Banks facing calls to raise their capital ratios can respond by topping up their reserves – in the way Sir Mervyn suggests, for example – or by shrinking the balance sheet, which sits on the other side of the equation. The latter is the easier option.
The Bank is doing its best to stop Britain's financial sector being dragged into a second credit crunch – making it clear yesterday, for example, that it is happy to see liquidity buffers run down at banks struggling with blocked-up wholesale funding markets. That will be helpful in the short term, but in the end the eurozone crisis is about solvency rather than liquidity – Sir Mervyn's desire to see capital reserves increased reflects his concern about banks' exposure to insolvent sovereigns across the channel.
The total compensation banks award their staff will be down on previous years – not because of the Bank's pleas, or even a desire to placate the City's critics, but because 2011 has been a miserable year for investment banking. Do not expect the banks' rainmakers to be any less demanding though, or for shareholders to compromise on dividend payments.
Where does that leave businesses and households who want to borrow? The short answer is not in a place that is any happier than today. That is to say credit will remain constrained – and many borrowers may find that even the loans they are offered come at too high a price.
Meanwhile, we wait with interest for further details of the counter-cyclical tools the Bank of England will soon have at its disposal in order to promote financial stability. One of those tools is expected to be the option of reducing capital requirements in order to promote credit provision at times of stress. The problem is that when the stress is caused by the potential for a banking crisis, that's not a tool the Bank can afford to use.
- 1 Three-year-old ultra-Orthodox Jewish children told 'the non-Jews' are 'evil' in worksheet produced by London school
- 2 Moscow voted the world's unfriendliest city
- 3 The excuses your boss is most likely to believe when you call in sick
- 4 I'm pansexual – here are the five biggest misconceptions about my sexuality
- 5 More than 11,000 Icelanders offer to house Syrian refugees to help European crisis
The excuses your boss is most likely to believe when you call in sick
Bono's group has made more money from Facebook investment than from all his music
Three-year-old ultra-Orthodox Jewish children told 'the non-Jews' are 'evil' in worksheet produced by London school
Wikipedia rocked by 'rogue editors' blackmail scam targeting small businesses and celebrities
More than 11,000 Icelanders offer to house Syrian refugees to help European crisis
Climate change: 2015 will be the hottest year on record 'by a mile', experts say
Jeremy Corbyn calls Osama bin Laden's killing a 'tragedy' - but was it taken out of context?
If these extraordinarily powerful images of a dead Syrian child washed up on a beach don’t change Europe’s attitude to refugees, what will?
If you're not already angry about the refugee crisis, here's a history lesson to remind you why you really should be
Theresa May says migrants should be banned from entering the UK unless they have jobs lined up
Tony Blair attacks Jeremy Corbyn's 'Alice In Wonderland' politics
iJobs Money & Business
£14000 - £16000 per annum: Recruitment Genius: This company was established in...
£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...
£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...
Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...