Ordinarily, I would have looked at this as another example of those in positions of regulatory and even legislative authority over the banks caving in to their general moaning about how difficult it is to do business in the current environment.
But in this case the change in the mandate is, I hope, a positive one in that it has been done with the express intention of encouraging banks to start lending again, something that is at the core of any kick-start (continuation?) of growth in any economy.
Top of UK financial advisers’ concerns for 2013 is continued sluggish growth in UK GDP, as reported here.
The original Basel plan was for all banks except the weakest ones, by 1 January, 2015, to have enough capital put aside, or enough liquid assets available, equating to 100% of their outgoings for 30 days in anticipation of any run on their assets as was evidenced by the queues snaking around the block at branches of Northern Rock five years ago.
Those banks that already meet the requirements probably do thanks to support from their central banks but the good thing is this support is now being phased out rather than cut out completely on one particular date.
Instead of 1 January, 2015, being the cut-off banks will have to hold 60% of the requirement by that date with an extra 10% added per year until 2019.
Will the banks play ball?
So if banks have had one huge barrier to lending removed, the question is now: “When will they resume lending in the right volumes and to the right businesses to make a positive impact on economic growth?”.
Mervyn King says that banks are “overflowing with liquid assets” although this new ruling does not mean that credit will be opened up tomorrow. There is still a very long way to go but this is a positive move. It is sensible as it no longer forces banks to hold on to more liquid assets at a time when they would have chosen not to, something that has possibly only served to negate any growth prospects.
It is now up to the banks, as the regulators and businesses have done their bit. This move is a huge step in the right direction so hopefully they will see it as positive and, slowly, open up their loan books.
It must also signal an end to QE or any equivalent measure. As Allister Heath argues in today’s City AM: “What is really required is to reintroduce the fear of failure into the banking system, and to banish bailouts and subsidies”.
The restructuring of these capital requirements is not the end of all banking crises let alone financial crises but hopefully it helps to signal the end of the current one…albeit it pushed out to 2019.
