Robert Jenkins, a member of the Bank of England’s Financial Policy Committee, said it’s “dishonest” of banks to argue that implementing tougher capital rules too quickly may harm the economy.
“The latest lobby tactic is to convince pundits, public and politicians that encouraging prudence too soon will hit the economy too hard,” Jenkins said in London today, according to the text of his remarks issued by the central bank. “This is no longer amusing. This strategy is intellectually dishonest and potentially damaging.”
The interim FPC, set up by the government to take over banking regulation, meets tomorrow in London to discuss ways to strengthen the financial system. Jenkins said lobbying by the financial industry led to “watered down” Basel capital rules, and that any moves to abandon them would further erode confidence in banks.
“The truth is that banks can strengthen their balance sheets without harming the economy,” Jenkins said. “They can do so by cutting bonuses, by curtailing intra-financial risk-taking and by raising term debt and equity.”
He also said that markets are “not closed to viable banks,” and the problem is that executives aren’t willing to pay the necessary price for funding.
“For the sound, well-run financial enterprise the money is there,” he said. “It is just not there at yesterday’s price.”
The Bank of England said today that concern among market participants of another shock to the financial system has increased as Europe grapples with its debt crisis. In the short term, more than half of respondents to a central bank survey found the probability of a high-impact event to be “high” or “very high,” up from 15 percent in the first half of the year.
“With instability from the euro area crisis threatening the U.K., our banks cannot avoid being exposed to outsized risks,” Deputy Governor Paul Tucker said in a speech today. “That is reflected in elevated funding costs.”
The Bloomberg Europe Banks Index has fallen 39 percent this year, while the FTSE 350 Banks Index is down 34 percent. That compares with a 19 percent decline for the benchmark Stoxx Europe 600 Index.
“Politicians could abandon Basel altogether and it would not change the market view of many banks,” Jenkins said. “What you would achieve is further erosion of confidence.”
He also said the argument that too-high capital levels will curtail economic growth is “potentially damaging because it promotes fear for an economy which the banks are there to serve and from which they draw their livelihood.”
The Bank of England will also release tomorrow minutes of its Nov. 10 monetary-policy decision, when officials voted to maintain the target for bond purchases at 275 billion pounds ($430 billion). The bank restarted the program in October to shield the U.K. from the fallout from the euro-region crisis.
“The traumas of the past few months will take a while to overcome,” Tucker said. He added that the “gloom should not be overdone” and the central bank will “continue to underpin demand.”