Mandarins and banks talk growth

SENIOR Treasury mandarins are locked in talks with banks in a desperate bid to boost lending, and have discussed relaxing the UK’s ultra-strict regulations to help stimulate growth, City A.M. can reveal.

Three banking sources have told City A.M. that senior Treasury (HMT) officials are “sympathetic” to their ideas, but could be put off pursuing them because of opposition from the Bank of England (BoE) and the FSA, which set the details of the rules.

Banks say their dialogue with HMT over regulation has been “constructive” due to its desire to foster growth, with civil servants soliciting ideas on how to combat frozen bank capital markets. Ideas discussed include:

Loosening the UK’s hyper-strict liquidity rules. The Basel III liquidity regime will come into effect from 2015, but the FSA has already imposed its own, before any other country. Banks argue this is bad for credit growth and could be relaxed to allow assets other than sovereign bonds to count towards the requirement.

Regulators could signal willingness to let more types of instrument count towards capital rules, such as covered bonds and asset-backed securities. The Basel Committee has already indicated that covered bonds are likely to be permitted but the FSA says it will not guide banks for another two years.

Regulators could indicate that any good-quality capital issued in the next six months will count, one banker said. And HMT could indicate that it will not drastically alter rules for imposing losses on bondholders who buy new debt in the next half-year.

Banks could also be allowed to dip into their cyclical buffers of capital in troubled times. UK regulators are currently undecided on this issue.

“A lot of the regulations are running counter to what HMT wants,” one senior source at a major UK bank said, referring to the desire for credit growth. But since the BoE and FSA have direct authority over the regulation, it could prove difficult for the Treasury to act on parts of banks’ wish list. All parties declined to comment.