02 December 2016

Financial Times: Britain stands alone with its tough stance on banks

Eight years after the financial crisis, most of the institutions are so much stronger and better capitalised than they were, and the laggards were so obvious that the tests are starting to get dull.

But, the Bank of England turned up the heat, hitting Britain’s seven largest banks with tougher stress tests. Royal Bank of Scotland, Standard Chartered and Barclays all failed to clear some of the hurdles, although only RBS was ordered to find more capital.

Warning that the UK vote to leave the EU and the US presidential election had “reinforced existing vulnerabilities” in the financial system, Mark Carney, BoE governor, also announced plans for an extra set of stress tests. These will focus on long-lasting, slow-burn problems rather than the usual sharp economic shocks.

The UK’s tough stance contrasts markedly with the rhetoric coming out of the US. One of President-elect Donald Trump’s main advisers is a vocal critic of the Dodd-Frank financial reform act, which was passed after the 2008 crisis. Paul Atkins also opposes levying big misconduct penalties on public companies, arguing that the payments simply punish shareholders. Republican congressional leaders are already drawing up plans to repeal or rewrite some of the most stringent rules imposed on US banks.

The shifting winds in the US come at a crucial time for global banking regulators, who are trying to finish their years-long effort to make banks safer. So far, agreement on the last pieces, dubbed Basel IV by the industry, has been elusive, although the chairman of the Basel Committee on Banking Regulation said he is still hoping to reach a deal by year-end.

Continental European regulators in particular are resisting efforts to limit banks’ use of their own models to measure the riskiness of their assets.

The US and UK are strong advocates for imposing “output floors” on the models. These would in effect raise capital requirements for some banks by pushing up the value of their risk-weighted assets. The Anglo-American regulators argue that floors are needed to prevent banks from trying to game the system by tweaking their models.

But the continental European regulators, led by the Germans, are fighting back. They argue that the floors unfairly penalise banks with unusually safe assets, such as those that keep a lot of low-risk mortgages on their books. That in turn will crimp much-needed lending.

Full article on Financial Times (subscription required)

© Financial Times