James Moore: Banks must pay for their insurance policies, too

Outlook The Bank of England doesn't appear to be for turning when it comes to the demands it is making on banks over the amount of capital they hold. That much was made clear at yesterday's Treasury Select Committee. It promises to make life uncomfortable for Barclays and Nationwide as they work out how to satisfy their new regulator's demands.

Much has been made of Barclays chief executive Antony Jenkins' suggestion over the weekend that his bank could crimp lending as a means of satisfying the Bank and its Prudential Regulation Authority, overseen by Andrew Bailey.

It responded by warning that any such move by Barclays would be swiftly rejected.

Critics of the new get tough stance by the Bank argue that such a suggestion is outrageous. What Mr Bailey is doing, they claim, goes beyond what a regulator has any right to do.

Sure, they say, he's at liberty to make demands when it comes to capital. But in telling banks they're not allowed to crimp lending to satisfy those demands he is effectively stepping in and telling them how they should be running their businesses.

That state might have a case for doing this with Lloyds or Royal Bank of Scotland. In both cases it is the major or controlling shareholder, and capital provider. But not so with Barclays and Nationwide. They haven't had to go cap in hand to the British taxpayer (and have been lending pretty actively).

This misses the point. The state is still the lender of last resort to both institutions. It pumped billions into the financial system during the financial crisis, and both were beneficiaries because without it the whole financial system may have collapsed, taking them down with it.

The state effectively underwrites both institutions. Neither can be allowed to fail, and the executives at the head of both are well aware of that. If they were to run into difficulties, the state (for which read us as taxpayers) would ultimately pick up the tab.

As such, they both enjoy a free insurance policy; moreover the tacit existence of this makes it cheaper for them to borrow.

Thing is, insurers have always imposed conditions upon those they insure. That's why most of us have window locks, for example.

Now you can debate the way that the Bank has conducted this episode. It has been rather cack-handed. But Mr Bailey has every right to disbar Barclays (and Nationwide) from reigning in lending as a means of getting capital, or leverage, ratios to where the Bank of England would like them to be. That's simply the price of the insurance policy the Bank (and through it, all of us) provides.