Mervyns King, governor of the Bank of England’s reading a statement regarding the Monetary Policy Commission’s latest recommendations
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To highlight his main points
1. In the Bank of England’s first recommendation they tell banks to do whatever they can to raise capital without stopping lending but if the economy does not pick up they should stop lending and seek to raise external capital
2. The Bank of England’s Mervyns King then goes onto say that the governments banking regulator the FSA should “encourage” the banks to raise money without cutting lending.
3. Smaller UK banks and institutions only have small exposure to the Euro crisis
4. Euro area is crisis of solvency not liquidity
5. Only governments directly involved in Euro can find a way out of the crisis.
6. UK government must bolster UK financial system so it can deal with any problems that might hit.
A number of worrying points are brought up by Mervyns King, not only in what he says but in the way he makes his points.
For me the most obvious thing is the apparent disconnect he tries to portray between the Bank of England and the money centre banks. His statement seems to imply that the activities and business of the Bank of England is in no way connected to the largest UK banks.
I am not sure if he was deliberately trying to be misleading but that is how it came across to me.
Going back to the main points he made and reading between the lines.
The first point regarding the Monetary Policy Committees’ recommendations to banks. He is effectively saying to banks do what you can but if you cannot get up to the required reserve levels stop lending and look for “external capital”.
I read that as a veiled threat to the government that if the economy does not improve the banks will stop lending making the economy worse and with regards to “external capital”. That could mean banks issuing shares or it could be another way of saying banks seeking money from the taxpayer.
Banks can get external capital in two ways when they are cutting down their customer base. Either their shareholders come up with the cash, or as we have seen in 2008 until know, banks can go to the government for their external capital needs.
It is almost as if the Bank of England is in some way pushing back against extra regulations that have been put forward by government.
And point 2 reinforces this hypothesis. The Bank of England is saying to the regulator of the banks “encourage” banks to raise capital.
Unless my understanding of what the FSA does is completely wrong I do not know how the FSa can encourage the banks to do anything short of the FSA turning the other way when it sees activities, which it is supposed to stop.
Why for example, would the government say to OFCOM that it must encourage phone companies to increase their business?
Why would the government want the telephone regulator to get involved in the finances of the phone companies? To me it would seem outside the remit of the regulator and so does the FSA being asked to encourage banks to increase their capital.
Sorry if I am labouring the point.
Assuming that the Bank of England is asking for the FSA to look the other way (“encourage banks to raise capital” in the words of Mervyns King), I believe it can also be implied that if the FSA does not look the other way then the banks will stop lending.
If the FSA does not create a flexible enough environment for the banks to raise capital the Monetary Policy Committee is telling the banks they should stop lending.
Is there a bit of poker being played here will the FSA call the banks bluff by not reducing the regulations?
Mervyns King makes a point of stating the smaller financial institutions, what about the big financial institutions? I am sure the full report fills in the gaps.
Point 4, he is saying that the European government are insolvent, i.e. they have massive debts and no amount of cash is going to help. Granted it is a little confusing to separate solvency from liquidity.
Mervyns King is saying that only government can dig themselves out of the hole they are in. That may be true but the central banks cannot shirk the responsibility they played in getting the government into so much financial trouble.
Given point 4, he must mean that only the UK government can bolster the UK economy so could this be a call for more government bailouts of the UK financial institutions?
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