Mark Carney and the Bank of England relax rules for UK banks

A clear feature of the post Brexit referendum situation is a fall in bank share prices and perceived prospects. A chill wind has gone through not only UK bank share prices but also European ones. Bloomberg have published this morning the results of a stress test model produced by New York University and unlike the official efforts it was signalling problems before Brexit day.

Even before Brexit, the model suggested that banks were much more fragile than official stress tests indicated: As of May 31, it estimated that the largest banks in the U.S., U.K., Germany, France and Italy (those with more than $500 billion in assets) would have a combined capital shortfall of $998 billion.

After the referendum it felt that this had happened.

After the Brexit vote, the shortfall rose significantly. As of June 28, it stood at $1.163 trillion, an increase of $165 billion.

Actually the UK is not top of the shortfall list as unsurprisingly it is headed by the United States but food for thought is provided by the fact that France is in second place and not the UK. If we move to relative economic size I note that the shortfall is highest in France at 12% of its Gross Domestic Product whereas the UK is just over 10% and the US a relatively mere 2%.

Some care is need here as we learn something but need to take care how much. Whilst we note that one can construct a stress test which more than the token bank actually fails this one has its own flaw. That is the way that it only looks at the larger banks and so records more problems in countries which have some combination of larger economies and a more concentrated banking system. For example it therefore rates Italy as relatively low risk ( a capital shortfall a bit under 5% of GDP ) because many of its problems are relatively small banks. For example the non performing loans at Monte dei Paschi di Siena that have come to the attention of the ECB are very big for it ( 38 billion Euros) but small relative to the scale used here.  That is why its shares are suspended as I type this at a price 7% below what was only yesterday a record low.

The UK economy

The banks do not exist in a vacuum as they both feed (hopefully anyway) and depend on the underlying economy. Bloomberg put it like this.

Why the pessimism? For U.K. banks, it’s pretty straightforward: Forecasters expect increased uncertainty and other Brexit-related difficulties to undermine economic growth, which in turn will narrow profit opportunities and make it harder for people and companies to pay back loans.

So troubled water is the immediate outlook as we await to see how we bridge it. This morning has brought further news from the front line or at least the Markit Purchasing Managers Index business surveys.

The PMI surveys indicate that the pace of UK economic growth slowed to just 0.2% in the second quarter, with a further loss of momentum in June as Brexit anxiety intensified.

That feeds into a picture where in terms of GDP growth we had been slowing ( 0.7% and then 0.4%) but also into a picture where that latest official industrial ( up 1.6% year on year in April) and manufacturing data had been relatively good.

A possible vulnerability

Whilst there may be issues over the mortgage book in time in the more immediate period we are more likely to see a signal from the unsecured credit which was growing so strongly.

Consumer credit increased by £1.5 billion in May, in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.7% and 9.9% respectively.

The Bank of England

It has a Financial Policy Committee for supervising the banks which is entwined in a spider’s web of bureaucracy with the Financial Conduct Authority and the Prudential Regulatory Authority. Last time the UK has a tripartite structure it failed utterly but I guess in Sir Humphrey’s world it was considered a triumphant model! As to the FPC itself apart from the Governor Mark Carney and perhaps Deputy Governor Ben Broadbent it is made up of individuals that very few people have ever heard of. I do know one other as some time ago I used to work with Clara Furse in the days before she became a Dame. In fact she did come to some attention as her appointment was criticised back in the day but the “serious concerns” of some MPs back then did not stop her being reappointed earlier this year.

What have they told us?

In the past they have continually told us that they are “vigilant”. I have been unkind and pointed out that they may have been vigilant about the Bank of England tea trolley but much less so about the boom in buy to let mortgage lending. This morning however the story has changed somewhat. Let us start with them looking firmly in the rear view mirror.

the UK commercial real estate (CRE) market, which had experienced particularly strong inflows of capital from overseas and where valuations in some segments of the market had become stretched;

Horse meet stable door as of course not only was the Standard Life property fund suspended yesterday but last week other commercial property funds imposed exit penalties. Moving on we see that the FPC has other concerns.

The FPC has monitored these channels of risk closely. There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging.

So closely is the new “vigilant”. We also get some actual measures of the position.

Equity prices of UK banks have fallen on average by 20%, with UK-focused banks experiencing the largest falls….Between 23 June and 1 July, investment-grade corporate bond yields fell by around 25 basis points. Wholesale debt funding costs for the major UK banks fell by a similar amount. Overall bank funding costs — taking into account any increase in the cost of equity and the change in wholesale debt funding costs — are broadly unchanged since the referendum.

So there is some good news there which is that overall bank funding costs are pretty much unchanged although some have risen and some fallen.

What will they do?

This was announced at 10:30 am today.

The FPC reduced the UK countercyclical capital buffer rate from 0.5% to 0% of banks’ UK exposures with immediate effect . Absent any material change in the outlook, and given the need to give banks the clarity necessary to facilitate their capital planning, the FPC expects to maintain a 0% UK countercyclical capital buffer rate until at least June 2017. …….. It will reduce regulatory capital buffers by £5.7 billion, raising banks’ capacity for lending to UK households and businesses by up to £150 billion.

You may note that this change has an implied multiplier of up to 26 from the change in bank capital rules. To stop some of the money leaking away this a ban on increases in dividends and also stock buybacks have been imposed.


This is a quantity move by the Bank of England and is a type of what is called macroprudential policy. In terms of numbers in his press conference Governor Carney said that net bank lending in the UK was £60 billion last year or 40% of the change in capacity announced today. Also these rules apply to three-quarters of the UK’s banks who make some 90% of the total of bank lending. So far the Governor’s performance has been much more like that on the Friday morning post the Brexit referendum which reminds me of this from Meatloaf.

‘Cause two out of three ain’t bad

However there is a catch which is that as for example Governor Kuroda has found in Japan and Mario Draghi in Europe you can expand the supply of credit all you like at the central level but will there be demand for it? Also will the banks respond to the central changes and actually supply credit as we wonder how the banks will interpret the word “viable” that Governor Carney has on repeat today.

Also a long running theme of mine gets a bit of emphasis.

the financing of the United Kingdom’s large current account deficit, which relied on continuing material inflows of portfolio and foreign direct investment;





33 thoughts on “Mark Carney and the Bank of England relax rules for UK banks

  1. The problem with banks is that you have no real idea what they have on their balance sheets and the idea that you can just look at the capital shortfall as a percentage of GDP and then stop worrying is crazy. If you get a run on a bank (see Lehmans etc), you don’t have time to do anything but fire everyone and close the doors. You then find out what all the counterparties had owing to them from the bust bank…
    I would take a bet that, should a couple of Italian banks keel over, there will be major consequences for Italy (including, I predict, a full blown anti-EU crisis, given that fact that EU rules plus the Euro make it impossible for Italy to sort the mess out, assuming that it had the will and wit to do so).

    • That’s a relatively safe bet James.

      Not that I’m an accountant-I know some of Shaun’s readership are- but even allowing for the supposedly onerous terms of Basel 3-the amount of capital some banks are holding opposite IO BTL mortgages is frighteningly small really.

      From my understanding the smaller banks use the standardized accounting system-others( I think) the IRB.The latter allows them to use their loan book history as a basis for predicting default.Can’t see a problem there unless they think the monetary policy and back door bail outs post 2008 is normal.

      • I am an accountant and former director of a bank. I have no confidence that:
        1. Banks have any idea about their loan books; but, more importantly
        2. Banks have no one senior who has the faintest understanding of the derivative books which they hold.
        I remember being told repeatedly that our book couldn’t go wrong because it was hedged both by the traders and by the back book. Well, our computerised book of derivatives went down and we traded blind for hours or days. We simply had no idea where we stood at all.

  2. Hi Shaun

    I agree with James above. That someone can assess the likely ramifications of difficulties in an organisation like DB beggars belief; you simply cannot and to suggest otherwise and have it believed says more about the gullibility of the media than of the measures themselves.

    What strikes you more and more about this is the utter irrelevance of people like MC; to me they are simply talking a book, even if they do actually know that what they say is utter rubbish. The antics in Italy to avoid using the EU bail in rules would be almost comical if it wasn’t potentially so serious because, if the bail in rules do prevail and the bondholders and uninsured depositors are hit, then the trouble would really begin. Which is worse: scrap the rules that only came in six months ago and have yet another state bail out or implement the rules and get hung by the plebs?

    That the choice is so stark just illustrates how dysfunctional the whole system is and how unlikely it is to survive.

    • Hi Bob J

      I agree that should a bank fail ( and with its share price falling by 20% today a “regular” on this blog Monte dei Paschi Siena is currently at the top of the list) it can then be like a game of dominoes. The concept if private insurance as in the Italian bad bank Atlante is that the other banks get weakened too.

      The other issue in Italy is that retail depositors were persuaded to invest in the various banks bonds ( another example of the chase for yield). This means that a bail in under EU rules would hit the ordinary Italian saver rather than wholesale investors.

      • As usual, the Americans acted much more quickly and decisively than Europeans did. I believe that AIG was rescued but Lehmans wasn’t because of the domino effect

        • Lehman and Bear Stearns were left to die as they were the only 2 US investment banks that refused to help out after the Long Term Capital Management collapse. The industry had been waiting for them to get theirs for 10 years.

  3. We have all been commenting on the dire state of banks worldwide, for a number of years now. Politicians and CBs are doing nothing about it, apart from hiding the truth. Can anyone suggest a scenario and timetable when the whole thing collapses? So far throwing taxpayers money at the problem has so far worked. How long can this continue?

    • Foxy, as i read your comment, a thought came to me…i’d like to know if anyone can suggest a scenario when the whole thing DOESN’T collapse? I can’t. Perhaps someone of Shaun’s readers can. Is there any conceivable way anyone can conjure up? This is not a trick question, I’m genuinely curious if there is a way out of this mess…

      • My personal view is that they can keep the plates spinning longer than many bright minds believe they can.

        I speak as someone who thought house prices were out of kilter with average salaries back in 2002…..what do I know?

        • Timing is extremely difficult you were not wrong Dutch you just underestimated the stupidity of the borrowers ,lenders and politicians but this will end catastrophically.
          Housing is not an investment it is an essential.
          Jonathan I do think disaster could still be averted but first those in control have to admit their mistakes,very unlikely.
          A new Bretton Woods should be convened gold has to be part of the solution it needs to be revalued.
          There is a huge obstacle the US and Britain may not have enough Mr Brown sold a significant portion of our reserves in 1999 at a knockdown price.
          The US is supposed to have 8000 tons but there has been no audit of Fort Knox since 1954 and when the Germans asked for the gold that the US holds for them in ‘safe keeping’ they were told it would take 7 years to repatriate the gold?
          More talk from Carney following the same pattern as Osborne yesterday,we are meant to take them seriously yet both have made speeches which contradict what they said before the referendum.

      • No one knows whether their derivitive bets are collectable or payable. It is an accident waiting for a place to happen and the banks have no incentive to reform while they can bluff dumb politicians into bonuses for failure.

        One way of reducing counterparty risk is to have a centralised settlements agency which records ALL derivitive trades and legally force all derivitive punters to register and settle through the central settlements agency. This agency needs the power to credit stop banks and/or demand more equity. Or if necessary take away their banking license. The premise is that counterparty failure is a banking industry problem – fix it or be shut down.

        Secondly create rules that get bank staff jailed for “working around settlement rules / credit limits”. And a rule that gets people jailed for risking financial stability.

        In summary – set up a system that shouldn’t fail and create laws that jail politicians who try to use public money to bail out banks ….

  4. Hi Shaun,

    Our two weakest major bans have been RBS and Lloyds. How would they fare with major bank and insurance companies having problems in mainland Europe?

    With Italy’s 132% of sovereign debt, I can’t see how they can afford a €400bn bank bailout so it looks like bond holders and deposits above government guarantees will be bailed in?

    Spain also has three weak banks, Belgium one and then there is Deutsche Bank in Germany and also exposed insurance companies. Is Europe’s repeated can kick as an ‘easier’ political alternative to making the banks tidy up their balance sheets about to catch up with them?

    Worryingly, this could make 2008 look like a kiddies tea party!

  5. What’s the betting that the extra money will find it’s way into the housing market rather than into business? Just when it looked like there might be a much needed crash (sorry correction) in house prices especially in London. All those who have over-extended themselves will be saved and no-one will go into negative equity but what about all those who can’t afford to buy in the first place?

    • RBS is the answer on how much finishes up in “piles of bricks” and how much in productive investment – the answer is pretty much all of it in the former. According to Barclays, “piles of bricks” are someone’s home, but if you want to borrow for anything productive, you will be paying through the nose.

      But it won’t be a problem – after all, Barclays are absolutely confident they will not have problems in a housing crash, because they are “well-regulated”. For disagreeing in May 2015 and offering a bet on a housing crash, I was fired a few days later. Shame really that bets are not legally enforceable. I am always moved to laughter when I hear that no-one foresaw 2008 – many people did and were ignored by those, who thought they could make a quick bonus/profit on property.

      It is perhaps ironic in this week of resignations that the woman presenter on Homes Under the Hammer (BBC 1) has also quit. I have seen that prog a few times and what struck me was that pre-08, they were always saying that you should buy at auction, put in a new kitchen/bathroom, add an extension and apply some paint for a quick profit of minimum £30K. Post-08, their advice was to do the property up and rent it out as the “done up” margin wasn’t there anymore. The BBC News page now says the prog is also presented by Dion Dublin – funny, I seem to remember him playing football, so he probably knows as much about property as I about football. It is an interesting mirror of the lunacy in the property market since the prog started in 2003.

  6. Hello Shaun ,

    So whats up with these property funds ?

    I’d have though all thats happened is what was going to happen as the housing market bubble bursts

    QE and MIRP/BIRP to follow , its not as if the BoE or Comical Carney have any imagination to think of anything else……

    Maybe my kids can then afford a house – prob not as they have to payoff all the other “debts”

    Why do I always get the impression I’m governed by incompetent fools ? well paid ones at that……. ( oh I see now …. )


    PS: popcorn , a comfy sofa and real life better than fiction on TV …..

    what a great time to live in …. BOOOM!

    • Hi Forbin

      There was an interesting snippet from Governor Carney at the Bank of England presser when he said that foreign investment in UK commercial property dried up in the first quarter of this year. So liquidity faded and now it would not take large selling to make a fund move into suspension. After all with main assets like shopping centers and malls as well as buildings it takes quite some time to realise cash on any scale. Also if you sell at a time like this then prices will take a dive.

      As to other funds joining Standard Life I am surprised all the main property funds have not joined it. Some will be taking money out just because they can…

      Also another 2% drop for corn prices although mind you the UK Pound £ was in hot pursuit…

  7. Great blog as always, Shaun. I noticed that Carney in his opening remarks at the press conference repeated something from the executive summary of the FSR: “Nothing in financial regulation will change until the process of the UK’s withdrawal from the European Union is complete, and until EU law ceases to have effect in the UK.” Maybe this was meant to reassure, but to me it almost seemed to imply that when the UK does leave the EU, assuming it does, the Bank of England regulators will face a tabula rasa. The referendum was on EU membership, not on a single market, and isn’t it likely that a lot of EU regulations will remain after Brexit? The UK could become a member of the EFTA or of the EEA or both, could it not?

    • Membership of either EFTA or EEA is possible but needs to be negotiated. EFTA looks a bad option -> Norway must comply with Brussels dictats and demands for money but with less influence to make/change legislation. But then all options look bad.

      EFTA requires freedom of movement – Boris and Nigel didn’t mention that !

      I’m a big fan of the EU, but the EC in Brussels has no democratic accountability or financial accountability. The EC budget and salaries are out of control. Brussels is lobbyist heaven and voters have no way to sack Juncker.

      Deviating into politics, I thought Cameron had a chance to ask for real reform and squandered it with petty window dressing policies. Europeans need a parliament and bureaucracy that serves the people – not an aristocracy that dictates and lives extravagently.

      • Ah, I see you have fallen for the biggest Brexit lie of all – “democracy”/”unelected”, best exemplified by the Essex oik, who rang Stig Abell’s LBC prog and rambled on about this. Stig responded that the Queen is not elected – to which the Essex oik replied “Ah, but that’s different. We’re British”.

        In fact, the Commissioners, headed by Juncker, are appointed by the national governments at one per state. Consequently, this is delegated democracy and the commissioners serve a five year term. Each commissioner has to be approved by the Parliament. It is no different from the UK Cabinet, House of Lords (except that is for life) and the monarch (accident of birth/death).

        How do you democratise it? Well, as soon as you start electing people, they have more power, due to the direct mandate – which is precisely why the national (elected) governments appoint them, so power remains in the national govts in the Council. If the Commission were elected and had a clash with the Council, then who would have the democratic authority? How would you vote them in? They are supposed to work for the EU, not national interests, so do we have pan-EU elections? How many European politicians can you name – let alone UK ones! If they are elected as one per state, they are answerable to a national electorate, not the whole EU.

        It is not quite as simple as Nigel “resigned and unresigned” Farage would have you believe.

        Sorry for the digression, but i studied EU law at university and become irate when I hear this “unelected” nonsense.

        • Absolutely David. But it’s only nonsense because “unelected” and “undemocratic” are euphemisms for all the issues you describe in a delegated democracy which looks too much like an oligarchy. So many people think democratic authority is too far removed from democratic accountability. (They have a problem with “Brussels”, not “Strasbourg”) .
          Unfortunately the EU is stuck with a delegated democracy until it turns into a United States of Europe and can have a directly elected bicameral legislature (and President!)

          It’s all a real pity but there it is. It causes all sort of problems as the man at the ECB knows only too well.

        • Hello ? Did I say “unelected” ??? I said lack of accountability. I said salaries way too high in a time of austerity.

          As a student of EU law, you might like to enlighten us of what sanctions apply to people who defraud EU funds. You might also like to tell us about what sanctions apply to EU treaty breakers, especially in regard of cross border bailouts and excessive deficits. Enlighten me as to which Eurocrats and politicians have been punished for fraud and treaty breaking. To me, without legal training, it looks like the spirit of the treaties has been violated and I don’t care for Bill Clinton style legal definitons of dubious accuracy. Merely firing Edith Cresson isn’t good enough.

          I suggest that the EU reforms itself to copy Switzerland’s law by referendum. Europe wide referendum on laws – to unite European voters and make the EC accountable to voters. I’d also suggest that failure to reform the EC will probably wreck the EU. Just look at the trends, Hollande 17% approval Le Pen gaining and wanting to emulate Farage’s vote. Look at the AfD’s rise, and imagine a German referendum where voters are dissatisfied with Juncker’s disregard for the excessive deficits procedures, the no cross border bailouts treaty and Mario’s disregard for financial stability.

          I regard the EC as not fit for purpose. Costs are out of control. Imposing austerity on member states while demanding ever more money may be legal under EU law – but remember that some voters will seize whatever options they have to say this is not okay for us …… and I hardly started on corruption

    • Yes Andrew, I thought it was a strange turn of phrase. EU Directives which have been implemented via UK legislation will continue to be in effect until repealed; which may or may not happen regardless of leaving the Union. EU Regulations will cease to have effect upon leaving the Union; but whether they will actually cease is, I think, an open issue, (the vacuum cleaner problem!) Surely the Govnr. understands the difference. Maybe he’s only talking about “regulations”. Who knows?

    • Art 50 (when triggered!) allows two years of negotiations, extendable by agreement, but if no complete agreement is reached, then the treaties are wiped as effectively as your computer blowing up!

      However, the problems is (and we should not confuse the general reference to regulation with the regulations, which are specific European instruments) that while the European angle will disappear and with it, specific regulations, any UK laws and statutory instruments passed by the UK Parliament pursuant to European directives will still be in force. A directive is really a statement of common European policy, but each state does the detail to suit its own national legal framework – much of the argument about the involvement of the EU in UK law was confused by this.

      The most famous recent Directive is MiFiD (Markets in Financial Instruments Directive) of November 2007. Its purpose is mainly to create the single market in financial services by allowing the passporting of a national financial company’s services into another state. The host nation is the regulator, so the host nation still has its own framework. Consequently, if the treaties just end, MiFiD will disappear and passporting will end. However, the UK framework will still exist. Obviously, passporting of financial services is very important for the UK, so the continuation of MiFiD will be part of the negotiations.

      It is not quite as Nigel said!

  8. Following on from yesterday’s blog/comments, I am full agreement with your last point and just today, we can see where this is all headed. Three property (mostly commercial) funds have now closed withdrawals – the panic over this is obviously spreading, which is hardly surprising when a tanking economy will not produce the businesses to fill these properties (hence my example yesterday of Canary Wharf) and of course, the plummeting GBP – your average foreign investment has lost about 15% in FX terms since Nigel (and his EU salary) got his country back. Given the amounts of borrowing on margin probably involved, it is no surprise that there is actually capital leaving he country – so what will finance the trade deficit, especially when the J curve kicks in.

    Nigel and Boris said it would be okay …

    • Forgot the traditional song (no, nothing from The Sweet this time!), so this from the Steve Miller Band:

      “They got the money, hey
      You know they got away
      They headed down south and they’re still running today
      Singin’ go on take the money and run
      Go on take the money and run
      Go on take the money and run
      Go on take the money and run
      Go on take the money and run
      Go on take the money and run
      Go on take the money and run
      Go on take the money and run”

    • You don’t runs on banks with low levels of leverage and plenty of capital.

      The reasons these businesses are facing cash calls is that everyone has known for some considerable time that they hold illiquid,overpriced real estate the other side of your capital.

      All Brexit has done has is speed up the process of said illiquid business being introduced to Mr Market.

      You know if houses get cheap enough,poor people might be able to afford one or would we rather they stayed renting off the big fat London corporations and all the people pleading for special treatment and second referendums.

      It really is funny how we never heard much squealing when steelwroks in the North Eats get closed but heaven forbid anyone touches the property ponzi.

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