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The architect of the UK’s regulatory response to the financial crisis has accused the Bank of England of making a mistake by cutting its estimate of how much capital the banking system needs.
Sir John Vickers, the University of Oxford academic who chaired the Independent Commission on Banking that examined how to avoid a repeat of the 2008 crash, said reducing bank capital requirements would fund higher payouts to shareholders instead of more lending.
The UK’s higher government debt, rising macroeconomic risks and threats to the global trading system “point to a need for higher rather than lower bank capital requirements”, Vickers wrote in a joint article with David Aikman, director of the National Institute of Economic and Social Research, a UK think-tank.
They said there was “no compelling economic reason” to loosen bank capital rules, adding: “On the contrary, the Bank of England might have made a capital mistake.”
Their criticism is the most strident challenge to the BoE’s decision, announced last month, to lower “the appropriate benchmark” for the level of tier one capital that lenders need to be able to absorb losses during a crisis from 14 per cent to 13 per cent.
The BoE’s Financial Policy Committee said the potential cost of a banking crisis had been reduced because British lenders were less systemically important and were managing risks better than in 2015 when it made the initial 14 per cent assessment.
Its decision followed calls from Prime Minister Sir Keir Starmer’s government for the BoE to do more to boost the UK’s sluggish economy by funnelling more funding into high-growth companies.
But Vickers and Aikman wrote in the article, published on the CEPR’s VoxEU blog on Thursday, that the central bank’s decision “might look odd” to many observers.
“Political and lobbying pressure to relax this key element of regulation should, in our view, have been resisted,” they wrote. “The most likely practical effect of this weakening of financial stability regulation will be higher payouts to bank shareholders, rather than increased lending to the real economy.”
In response to the article, the BoE said: “We, of course, welcome contributions to the debate but it is simply wrong to suggest that the banking system remains dependent on government support and fiscal capacity. We now have a resolution regime that avoids the problems seen in the financial crisis.”
The central bank has invited feedback on its bank capital decision until April 2.
Vickers and Aikman said the BoE’s own data had indicated there would be little if any net economic benefit from reducing bank capital requirements. They said it was “unclear why a financial stability regulator should choose the lower, and hence riskier, end of its own range”.
“Macroeconomic risks, including now even to the global trading order, have increased markedly, and the UK’s fiscal position is much more stretched,” they wrote.
Separately, the BoE on Thursday announced plans to scale back its main supervisory meetings to check key risks at the banks, building societies and insurers it oversees, by doing these only once every two years instead of annually.
The BoE’s Prudential Regulation Authority said in its annual letter outlining key priorities that this would “reduce the regulatory burden on firms, in line with our secondary objective to facilitate UK competitiveness and growth”.
It also plans to speed up its decisions on senior management appointments, authorisations of new companies and changes to internal models, as well as to develop a new regime for captive insurers by next year and to streamline data-reporting requirements.
This article has been amended to reflect the fact that David Aikman is director of the National Institute of Economic and Social Research, not as previously stated the Centre for Economic Policy Research