How much capital?

Last week the Bank of England defended its position on bank capital after it had been urged to rethink by Sir John Vickers. It’s quite unusual to see this type of spat in public. From a taxpayer’s perspective it is worrying. After all a dysfunctional banking system has and is costing us dear. The question of how much capital a bank should hold is not straight forward. What counts as capital and exactly what risk weightings apply has become alchemy. What we do know is that leveraged businesses risk failure and banks are highly leveraged. In their letter to the FT, Andrew Bailey and Sir Jon Cunliffe draw heavily on data to defend their view. Stating “…our banks are now 10 times more resilient than before the crisis”. How can top regulators be so definitive? Does it mean we are ten times safer? It’s nonsense. It’s all subjective. The trouble is that if the BoE is wrong (and let’s face it the track record isn’t good) easing back on bank capital ratios and relying on complexity echoes the light touch approach that got us into trouble in the first place. Until we know exactly what’s on balance sheets and have gone through the resolution process at least once a “margin of safety” would be in order. In this respect Vickers is right. Unfortunately there are few people who have the skill and knowledge to challenge the BoE which appears to be driven increasingly by “political” considerations.