Carney tears up King’s rulebook

Tim Wallace
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BANK lending is in line for a £90bn boost after Mark Carney yesterday agreed to let the safest institutions divert resources away from regulatory liquidity buffers and into business and household credit.
It comes after business secretary Vince Cable called the Bank of England the “capital Taliban,” claiming regulators’ tough capital requirements were hitting lending levels.
Carney’s plans also mark a stark change of tone from Lord King’s time at the top of the Bank – the former governor was insistent that strict capital rules would not harm lending, but the new liquidity rule is a clear step away from that hard line.
Critics of the Bank of England have argued tough capital ratio requirements and a three per cent leverage ratio are restraining lending.
For instance the Nationwide, a building society considered exceptionally safe and stable, has had to delay plans to expand small business lending because the Bank told it to reduce its leverage ratio to three per cent.
It has also launched a debt buy back programme, purchasing up to £715m of permanent interest-bearing shares (PIBS) from investors to shore up its position to meet regulators’ demands.
But yesterday Carney denied the tough capital rules were a problem in themselves, particularly once the easier liquidity rules come into effect.
“Some argue that the repair of banks’ balance sheets holds back economic recovery because it causes banks to cut back their lending,” he told businesses in Nottingham. “The reality is the opposite: where capital has been rebuilt and balance sheets repaired, banking systems and economies have prospered.”
He pointed to the US as an example, where lending fell much more sharply in the financial crisis as banks recapitalised, but is now growing more quickly than in the UK.
When capital ratios improve, investors have more faith in banks and so are less likely to panic and pull their money out. As a result, lenders with strong capital ratios will be allowed to hold a smaller liquidity buffer, lending out those resources.
Currently most big lenders hold liquid assets – like cash and government bonds – worth 100 per cent of the liquidity coverage requirement (LCR) that is, enough to cover 30 days of net cash outflows. Now, those who have hit the capital targets will be allowed to hold liquidity buffers of 80 per cent.
When all the big lenders are eligible, the Bank expects this to free up £90bn for lending to firms and households.
The new governor also used his debut speech to reassure markets it will be several years before he even considers hiking interest rates, and said he could even turn the printing presses back on if the recovery shows signs of faltering.
And he tried to calm fears of a new housing bubble, vowing that he is ready to take action against such threats to financial stability. Carney stressed that if a bubble does develop he can restrain mortgage lending without raising interest rates, under new prudential powers.