View more on these topics

Size matters on capital adequacy

Bob Hunt 150

Although existing capital adequacy requirements sometimes get a bad rep for spoiling banks’ appetite for mortgage lending, such measures are vital to prevent a repeat of the calamitous collapses that saw the public have to bail out the banks during the global financial crisis.

That said, it is important that we keep a watching brief and ensure that the restrictions remain relevant to market conditions and that they are applied evenly across the board. Two items I read recently have suggested this may not always be the case which is a cause for concern.

First was the recommendation by the Parliamentary Commission on Banking Standards to introduce higher bank capital requirements. Sir John Vickers suggested banks set aside a minimum of 4.06 per cent of capital, but the Government rightly responded that it will only go as far as the 3 per cent outlined in Basel III.

There are instances where it can be useful to go beyond minimum requirements, but this is not one of them. Mortgage lending activity has been hamstrung enough by the existing measures and suffocating a market that is still struggling to breathe easily is not advisable.

Secondly, while it is perhaps to be expected that different-sized organisations may have different capital expectations placed on them, there seems to be some confusion about who is required to do what. On the one hand we have a spokesperson for the Building Societies Association – rightly in my opinion – describing a single leverage ratio for building societies and banks as a “blunt instrument” that fails to acknowledge the different risk profiles involved, but elsewhere the Independent Commission on Banking’s research found that small banks have to hold three to seven times the capital of their larger counterparts.

Something doesn’t quite add up and we certainly need an approach that recognises the differing sizes and strategies of lenders rather than a one-size fits all approach.

Recommended

1,522 homes bought under NewBuy in 2012

By the end of 2012, 1,522 home purchases had been completed under the Government’s NewBuy Guarantee scheme in England. Figures from the Department for Communities and Local Government today show the Government’s liability increased to £15.4m over the same period time while it incurred no costs. The main aim of the Government-guaranteed scheme is to […]

Life begins at…

By Fiona Holmes, proposition communications manager Having reached a certain age (it’s the new 40 by the way), I’m having to come to terms with the fact that my peers and I aren’t as immune from illness or death as we’d like to think. That’s the problem with 30 being the new 20 and 40 […]

Newsletter

News and expert analysis straight to your inbox

Sign up