The Bank of England’s financial policy committee has been ruffling feathers in Parliament as a regulatory leviathon, the decisions of which will directly hit life on the financial street.
Depending on the tool kit designed for it by its forerunner, the interim-FPC, the committee proper could set loan to value ratios, income to deposit ratios as well as the loftier core tier one capital requirements for banks. Whatever it says, so the argument goes, financial institutions will be expected to listen.
But, in results posted last week by Barclays, the bank seemed to half ignore advice to restrain bonuses and dividends to build up reserves offered by the King of the Bank, Mervyn. The governor chairs the FPC, and in December King used its second financial stability report to warn banks to batten down the capital hatches against a potential financial hurricane threatening them from the continent.
Although Barclays cut bonuses by a quarter across the group, it also increased dividends by 9 per cent. Bonuses dropped from £3.5bn to £2.6 bn, dividends rose from £670m to £732m. The overall payout to staff and shareholders has fallen, the increase in dividends is smaller than the cut in bonuses. The bank says it has a “sturdy” capital buffer of 11 per cent. But King said banks needed to go further than the “significant progress” they had already made in boosting capital, such was the “significant and immediate threat” posed by the sovereign debt crisis to the UK banking system.
Given the FPC is not yet fully functional, perhaps it is not that surprising banks feel able to test their limits. But, the Bank of England would do well to take this as a lesson in the job it has ahead of it. Banks and other financial institutions are likely to wriggle within any scope they are given – it is only natural. The FPC will have to be wise to this. If it is setting limits on these institutions which will have a direct impact on people trying to get a mortgage, or a loan to start a business, they must get the mechanics right. Most firms will of course wriggle within the rules, but how those rules are written will dictate what actually happens and that might not be exactly what was intended.