Bank of England is hit for using old data to push for capital hike

Tim Wallace
Follow Tim
THE BANK of England’s finance sector models are hopelessly out of date, leading the central bank to wrongly push for banks to hold more capital even though the sector has made enormous progress since the financial crisis, a top analyst warned yesterday.

Policymakers at the Bank have repeatedly said banks will see the cost of equity fall – potentially to as low at five or six per cent – if they raise capital levels further.

But UBS’s Alastair Ryan warns this is based on market data that is years out of date.

“The Bank of England’s argument is based on a model that is at its most powerful when markets see banks as grossly over-leveraged,” he said.

“The policymakers’ conclusions are drawn from 2008-9 when markets discovered banks were in this position. But as capital levels have risen, diminishing returns set in, and we can see how markets treat banks now.”

Instead, he doubts the cost of equity will fall below 11 per cent.

Ryan also warned the European Central Bank’s latest policy of promising to buy Spanish bonds will only work in the short term, leading to another year of recurring crises in the Eurozone.

“The outright monetary transactions (OMT) programme could buy perhaps €200bn (£160bn) of Spanish debt – what can the ECB do next?” Ryan asked. “This is only a stop gap, and, like previous programmes, will be at its most powerful before it is triggered.”