Shortly after the Adam Smith Institute/Cochrane/Dowd bank capital report came out on May 1st, the Bank of England has inadvertently confirmed our report’s core message – that UK banks are far from being adequately capitalised.
Sir John Vickers and I have been trying to tell the Bank this for years, and yet the BoE still remains in denial on this most important of prudential questions.
To quote a story in today’s Financial Times (“Bank of England warned criminal charge could destabilise Barclays” 15 May 2019):
“The Bank of England warned prosecutors that a criminal charge against Barclays could present an existential threat to the lender, showing that regulators still worry about large banks being “too big to jail”.
According to people familiar with the matter, in 2017, Sam Woods, the BoE’s top banking supervisor, told David Green, the then-director of the Serious Fraud Office, that there could be unpredictable consequences if there were charges against Barclays over crisis-era payments to Qatar.
Mr Woods questioned whether a corporate criminal charge would be in the public interest as officials believed it would present a small – but not insignificant – threat to Barclays’ safety and soundness. …
Although the SFO went ahead and charged Barclays in June 2017, the BoE’s intervention shows a lingering concern that a criminal prosecution could destabilise large lenders. This “too big to jail” fear has long hampered enforcement action in the UK and US, setting off fierce public debate on both sides of the Atlantic.”
Let’s look at the basic ratios. As of 2018q3, when I last analysed the ratios, Barclays had a CET1 ratio (a ratio of CET1 capital to Risk-Weighted Assets) of 13.2%, a Tier 1 leverage ratio of 4.9%, and a CET1 to total assets ratio of 3.56%. At the time the BoE’s Financial Stability Report came out in November, Barclays had a price-to-book ratio of 44%, now 43%, and a market cap to total assets ratio of 2.47%. These latter two ratios are red flags.
Even so, Barclays passed the stress tests and the BoE painted the banking system in the rosiest of terms. To quote the November 2018 FSR:
“Major UK banks have continued to strengthen their capital positions. They started the 2018 stress test with an aggregate common equity Tier 1 (CET1) capital ratio nearly three and a half times higher than before the global financial crisis.
The test shows the UK banking system is resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis and that are combined with large falls in asset prices and a separate stress of misconduct costs.
Despite facing loss rates consistent with the global financial crisis, the major UK banks’ aggregate CET1 capital ratio after the stress would still be twice its level before the crisis. All participating banks remain above their risk-weighted CET1 capital and Tier 1 leverage hurdle rates and would be able to continue to meet credit demand from the real economy, even in this very severe stress.” (November 2018 FSR, p. 2)
So the banks are “resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis and that are combined with large falls in asset prices and a separate stress of misconduct costs,” but banks might not be resilient to the BoE imposing a hefty fine on Barclays for its past misdemeanours.
Barclays after all is a globally systemically important bank.
The Bank’s actions reveal its true beliefs. The Bank’s actions on Barclays reveal that it is still not confident about the resilience of UK banks, even if the Bank in its Financial Stability Reports and stress test reports relentlessly trumpets its confidence that UK banks are strong and resilient. But then one presumes the Bank would have to say that.
Also, if the big banks are resilient, then presumably they must be trusted, but how can they be trusted if the BoE is reluctant to bring them to account?
The FT article quotes the Bank’s explanation:
“Since the financial crisis, the PRA has taken a number of steps to ensure the senior management are accountable of their decisions. Whether to take a charging decision or not is a matter for the Serious Fraud Office only, and is not one for the PRA.”
So accountable but still too big to jail, and the buck deftly passed to the SFO.