Bank of England governor Mervyn King has defended moves by UK banks to sell assets at a loss when he appeared in front of the Treasury Select Committee this morning.
A number of banks have recently sold healthy assets to bolster their balance sheets. These disposals often involve large haircuts of more than 50 per cent, after which purchasing equity funds turn the assets around at 80p in the pound.
King (pictured) told the TSC that this hit to profitability is justified because, in reducing the size of the balance sheets through the sale of performing assets, the banks are offering much-needed reassurance to the markets.
The governor also claims it is impossible to say how much capital banks should be required to hold. The discrediting of the pre-crisis belief that minimal capital levels would be sufficient has robbed markets of the ability to judge what is needed, he argued. (article continues below)
“Markets are very nervous as they have no experience to calibrate how much banks are required to have,” King says.