Bank of England financial stability report finds UK banks' capital ratios may be overstated
Mervyn King, Bank of England governor, feels that future credit losses may be understated, costs arising from past failures may not be fully recognised, and risk weights used to calculate banks' capital ratios may be too optimistic. December 05, 2012 | Mervyn KingSince we met in the summer, sentiment in financial markets has improved a little, supported by policy actions from a number of central banks. But the underlying picture for global growth remains weak, and significant adjustments in indebtedness and competitiveness are still required in the euro area. Inevitably, that has implications for our own banking system and economy. Against that background, the Financial Policy Committee’s (FPC) primary concern has been to ensure that UK banks have sufficient capital to underpin the resilience of the banking system, so that they are on a solid footing to support economic growth. The danger to be avoided is that of inadequately capitalised banks holding back our recovery. Over the past year, the FPC has emphasised the need for banks to continue to build and maintain capital buffers against unexpected losses, for example arising from euro-area stresses. And UK banks currently report substantial buffers over the minimum level allowed. But, in judging whether banks are adequately capitalised, we need to ensure that reported capital ratios do in fact provide an accurate picture of banks’ health. At present there are good reasons to think that they do not. That uncertainty around capital adequacy is in part responsible for low investor confidence in banks, whose equity is valued by the market at on average only two thirds of its book value. Investors need confidence that banks have adequate buffers against stress in order to be willing to fund them at the low rates necessary to support a recovery. In today’s Report we draw attention to three reasons that lead us to think that UK banks’ capital ratios – and hence the buffers available to absorb unexpected losses – are currently overstated. First, expected future credit losses may be understated; second, costs arising from past failures of conduct may not be fully recognised; and third, the risk weights used by banks in calculating their capital ra... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Capital & Strategic Issues, Government Finance, Performance Management, Risk and RegulationCapital & Strategic Issues,Government Finance,Performance Management,Risk and Regulation, Capital & Strategic Issues,Government Finance,Performance Management,Risk and Regulation, , Performance Measurementperformance, Performance Measurement, Keywords:Mervyn King, Bank Of England, FPC, FSA UK, Funding For Lending Scheme Mervyn King, Bank of England, FPC, FSA UK, Funding for Lending Scheme
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