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Bailey also sought to head off critics who accuse him of being too slow and opaque, and allowing lenders to avoid raising fresh capital. "I make no apology for doing this quietly. I am much more interested in the outcomes than the running commentary", he said. "As we near the end of a timely but not rushed process, we will be communicating in the next few weeks the headline results of this work", he added. The work is expected to be completed this month.
Banks have argued they cannot build up capital and lend more to the sluggish UK economy but Bailey said additional capital supported lending by making the banks stronger. "The PRA is in discussion with the banks on the issue of capital... Many commentators and journalists have worried publicly that these recommendations will lead to lower bank lending. I want to reassure you, that is not the case. Capital is not money that has to be stashed away for a rainy day. Essentially, it is the shareholders’ stake in the company. In non-financial companies, shareholder capital or equity is used to finance the acquisition of assets. The same is true for banks. Equity finances the provision of loans to households and companies. In that sense, additional capital supports lending by banks and does not substitute for it. Higher capital ensures that enough of the finance raised by banks is in a form that is capable of absorbing losses without the banks going bust.
"Much of the discussion on capital is couched in terms of a ratio to risk-weighted assets. But another more basic yardstick of a bank’s ability to withstand losses is the leverage ratio. This is simply the bank’s capital expressed as a proportion of its assets. So a further test that we should consider is whether banks are making acceptable progress towards the Basel III minimum leverage ratio. Basel III requires that banks have leverage ratios in excess of 3 per cent.
"In asking banks to have a larger share of equity on their balance sheet, we are for the most part dealing with legacy issues. The whole point of this exercise is to move more rapidly to put the past and its problems behind us. This emphasis on legacy explains why it is possible to want more capital to back old risks while easing the capital requirements on new lending to the real economy. Frankly, this is about convincingly putting the past behind us."