Alastair Darling To Demand Bigger Capital Ratios To Make Sure All This Never Happens Again
The FT has got some details of Alastair Darling’s white paper on the future of banking that’s out next month, and it sounds like the regulation Lord Turner called for last month is getting implemented. Rather than taking the Glass-Steagall approach where the investment arms of major banks would be split off from their commercial other halves (an idea possibly favoured by George Osbourne), Darling is instead going to let them stay together (awww!) as long as they’ve got a big buffer of cash to prevent a credit crisis happening again.
He’s going to call for greater capital ratios, which are the amount of capital a bank has relative to its risky assets. It’s a buffer to cash designed to absorb losses made if someone, say, defaults on payments for their house. As you may have noticed, quite a few people have been doing that recently, so banks have needed recapitalisation, i.e. bailouts to plump up their capital reserves and give them the confidence to start trading again. Now Darling’s making sure that capital ratios will be big enough in the future to deal with unexpectedly massive levels of defaulting, so that the government never has to intervene again.
This comes as ratings agency and all-round financial services pie-fingerer Standard and Poor’s has announced new regulations regarding capital ratios in the US. “Current regulatory ratios are not satisfactory”, they said, bringing in their new risk-adjusted captial (RAC) ratio, that allows for less capital if you’re dealing in safe-as-houses investments, and demands more if you’re working with riskier assets. They’re saying if you use their plan, you could have ratios as little as 5.5% and still weather a financial crisis, surprising considering Lloyds is currently at 14.5% to make sure it’s healthy. I think Darling will be demanding rather more than 5.5% – he’ll use a big standardised ratio format to make everyone feel super-confident, and him look like a safe pair of hands.
Posted by Ben Beaumont-Thomas in Hot Money | April 28, 2009 10:11AM |