boe – Page 3 – The Eumaeus Project

May 27, 2020March 24, 2021

More Market Value Nonsense from the Bank

In his opening remarks to the Treasury Committee on May 20^th, Governor Bailey made an interesting observation point about market values:

… had you done a stress test in the run-up the financial crisis on the market value, you would have been doing it on the market values that were trading well in excess of book values, so … that would of course have severely misled you. You would have concluded there was no problem and you would obviously have been badly wrong. (Our emphasis)

Mr. Bailey isn’t the first Bank spokesman to make this claim. The Bank’s head of financial stability Alex Brazier said as much in almost the same words back in January 2017:

… if you had [relied on market cap values] before the crisis, you would have been led completely astray … You would have been led to the conclusion that the British banking system was remarkably resilient, and, as forecasting errors go, that would have been quite a good one. ¹

It’s an important point, but it is wrong. Flat out wrong.

It’s a shame that none of the MPs challenged it.

Continue reading “More Market Value Nonsense from the Bank”

May 23, 2020May 25, 2020

Another Gem from the PRA

Capillamentum? Haudquaquam conieci esse! – A wig? I never would have guessed! PRA meeting, believed to be not later than 79 AD

“It seems an unaccountable thing how one soothsayer can refrain from laughing when he sees another,” remarked Cicero in De Natura Deorum, I. 71. His point is that while the profession demands a certain gravitas in front of the ordinary public, its members have a jolly good laugh in private, because they all know they are frauds.

Which point takes us to this stunningly absurd speech by Charlotte Gerken (PRA director of life insurance). It is written by an impressive collection of individuals and expressed with utmost dignity, yet we imagine that they must have had a few giggles when they gathered in the halls of the PRA to write this impressive piece of tosh.

Continue reading “Another Gem from the PRA”

May 20, 2020May 20, 2020

Are Britain’s banks strong enough for coronavirus?

Howard Mustoe’s article on banking strength is here. Quite long, but worth it (of course!). It quotes Durham University Professor Kevin Dowd and former Bank of England regulator Dean Buckner saying the most appropriate capital measure is a market value one, which is based on banks’ share prices.

This is calculated by multiplying the number of shares in issue by the current share price. They prefer this measure because share prices are an up-to-date reflection of what investors think a company is worth, whereas the banks’ reported figures are not.

True, although other miserable people say to focus on book value.

Continue reading “Are Britain’s banks strong enough for coronavirus?”

May 6, 2020May 7, 2020

Can UK Banks Pass the COVID-19 Stress Test?

Eumaeus is pleased to release our report Can UK Banks Pass the COVID-19 Stress Test? on the dire state of the UK banking system.

In his final remarks as Governor, Mark Carney reiterated the same upbeat message that he has always given, that the UK banking system is superstrong:

Some watching will recall the financial crisis a little more than a decade ago. Then, the financial system was the core of the problem. Now, it can be part of the solution.

Over the past decade, the UK financial system has been transformed. We didn’t build this strength for its own sake.

This is prudence with a purpose.

Resilience with a reason.

Deputy governor Sam Woods said much the same to the Treasury Committee on Wednesday April 15^th:

We go into this with a well capitalised banking sector.

We don’t think so. Our report explains why.

Continue reading “Can UK Banks Pass the COVID-19 Stress Test?”

May 6, 2020May 6, 2020

Hegel on an Off Day: Kevin’s Response to CP 2 20

Last week Eumaeus posted Dean’s response to the PRA’s Consultation Paper CP 2 20.

Here is mine.

My first impression about CP 2/20 is one of overwhelming bafflement. The PRA has a statutory duty to consult when proposing new rules, but there is also an implied obligation to consult clearly and intelligibly.

It is one thing for the Regulatory ‘Will’ to be inscrutable, but it is quite another when that Will becomes inscrutable to the point of unintelligible. CP 2/20 reads as if it could have been written by Hegel on an off day.”

April 30, 2020

UK Shareholders’ Response to Consultation on Capital Requirements and Macroprudential Buffers

On the UK Shareholders website here.

UKSA has submitted a response to the Prudential Regulation Authority’s Consultation Paper CP2/20 on Capital Requirements and Macroprudential Buffers

In a critical submission, UKSA has drawn the Authority’s attention to the lack of clarity and intelligibility of the Consultation Paper and argued that the proposed reduction in Pillar 2A is not contingent on any increase in the countercyclical buffer, leading to the asymmetry of an actual lowering of minimum capital requirements offsetting a hypothetical increase to the buffer.

I have written a few CPs in the past, but for sheer impenetrability this one takes the biscuit.

April 29, 2020July 22, 2020

Correctly pricing capital is key to investment

A letter appeared in the Financial Times this morning from Mark Cardale (Chairman, UK Shareholders Association) and someone called Dean Buckner (Policy Director, UK Shareholders Association).

Continue reading “Correctly pricing capital is key to investment”

April 9, 2020April 9, 2020

Off to a good start

April 5 2020 (article by Andrew Bailey in the Financial Times)

Bank of England is not doing ‘monetary financing’

… the Monetary Policy Committee voted last month to increase the bank’s bond holdings by £200bn to support the needs of the British people. Some external commentators are linking this move to fears that it that it may be using “monetary financing”, a permanent expansion of the central bank balance sheet with the aim of funding the government.

This type of reserve creation has been linked in other countries to runaway inflation. That is because it could undermine a central bank’s ability to control monetary conditions over the medium term. Using monetary financing would damage credibility on controlling inflation by eroding operational independence. It would also ultimately result in an unsustainable central bank balance sheet and is incompatible with the pursuit of an inflation target by an independent central bank.

But the UK’s institutional safeguards rule out this approach.

April 9 2020

The UK has become the first country to embrace the monetary financing of government to fund the immediate cost of fighting coronavirus, with the Bank of England to directly finance the state’s spending needs on a temporary basis. The move would allow the government to bypass the bond market until the Covid-19 pandemic subsides even though it will face criticism it is engaged in Zimbabwe-style policy that has led to hyperinflation where it has persisted.

March 11, 2020

Crisis wot crisis

From our friends at the Bank today:

In response to the material fall in government bond yields in recent weeks, the PRC invites requests from insurance companies to use the flexibility in Solvency II regulations to recalculate the transitional measures that smooth the impact of market movements. This will support market functioning.

Transitional measures are a fake regulatory asset that can be used create capital to replace what is lost when liabilities rise through, e.g. fall in long term discount rate.

We could use this method to address the current epidemic. Instead of causing an epidemic by reporting the number of diagnosed cases, simply change it to a lower number.

Problem solved.

March 6, 2020