More capital not less RWAs October 5, 2012 at 12:59 pm

From a Citi research note ‘UK Banks and the Quantum of Capital’:

The FPC’s last meeting recognised that “some actions which boosted the resilience of individual banks could adversely affect near-term credit availability, for instance if requirements to increase capital ratios provoked deleveraging focused on UK lending”. To mitigate this risk, the FPC recommends banks reduce non-UK lending assets and increase their levels of equity capital. For the FPC, more capital in absolute terms could help fulfill its dual mandate, while higher capital ratios alone can be achieved by de-leveraging and this may not fulfill its dual mandate.

It is thinking like this that is (for better or worse) creating the ROE problem we discussed this morning.

3 Responses to “More capital not less RWAs”

  1. I think banks do need more capital and the fpc focus on nomimals is right. Banks will only be able to raise that capital on the market when the market accepts banks really are leas risky and less leveraged. Because then investors will accept the risk adjusted banks offer. But how to do that? Transparency on valuations and risk metrics is the best way. Then the capital will come. But , and this is a big but, that process will take years and be made harder by a rubbish real economy. Hence a transitional pro lem which policymakers seem blind to in their calls for more capital right now.

  2. And so we retreat behind our borders – because we don’t want to reduce domestic lending any further and we don’t want to dilute equity with rights issues. Foreign customers are a soft target, aren’t they?

    Of course, if we reduce foreign lending, it is just possible that we might lose foreign deposits too….after all, if we can retreat behind our borders, so can everyone else. Has the FPC thought of this?

  3. I agree with QM – it is a ‘how to get to there from here’ problem. No one has a good answer to that, and hence no one wants to focus on the effects of the command to go there.