Banks told extra capital could be key to lighter regulation

Bank of England's Jenkins floats idea of rollback in exchange for reserves

Banks should be forced to more than double the minimum levels of capital they are required to hold to protect against shocks if they want the regulatory noose to be loosened, a member of the Bank of England's Financial Policy Committee said last night.

In a speech in London, Robert Jenkins said "the best solution" if banks wanted their burden to be lightened would be to make themselves so strong that the worst economic shocks could be handled with relative ease.

Mr Jenkins said: "Let me suggest a deal – one which I stress is not in my gift and which I propose in my private capacity only. How about a moratorium on all new regulation followed by a review and rollback of the rule book. In exchange, all banks everywhere would be required to raise their tangible equity capital to 20 per cent of assets."

"We all agree that too many bankers got it wrong in the past and will get it wrong in the future," he said. "We acknowledge that too many regulators got it wrong in the past and will get it wrong in the future. We agree that the taxpayer should never again be stuck with the tab for our collective failures. And you now know that higher capital requirements need harm neither the economy nor bank shareholder."

Mr Jenkins, a former fund manager, said this was because the market was now "attaching relatively higher valuations to the relatively less leveraged (banks)".

"In short, higher capital requirements are compatible with economic growth and are compatible with shareholder value – they just are not compatible with non-risk-adjusted banker pay," he argued.

He went on: "Is banking regulation too tough? No. Is the demand for higher capital damaging? No. And are regulations too numerous? Maybe – but there is a potential solution, should the industry and body politic wish to pursue it."

Mr Jenkins pointed out that bankers would complain about regulation however light it is, using as an example a quote fulminating about the "remorseless rise in regulation" being a threat, which he took from a major industry report published in 2005, just three years before the financial crisis.

It came as the Bank of England's governor, Sir Mervyn King, called for banking reforms to be passed into law as soon as possible to "prevent the plans being watered down".

In a BBC radio interview he hinted that he would have preferred to see the "complete separation" of retail banking from the more risky investment side, but that the proposals for a less-ambitious ring-fencing of retail operations put forward by Sir John Vickers' Independent Commission on Banking were "the only game in town".

Sir Mervyn has spoken favourably about proposals by the US economist Laurence Kotlikoff, who has called for banks to be forced to hold deposits in cash mutual funds which could not be used for lending or any risky activities.