Banks, Financial

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Economy

Eurozone inflation climbs to highest since April 2014

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Financial

Wealth manager Brewin Dolphin hit by restructuring costs

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Financial

Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

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Banks

RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Categorized | Insurance

Bailey calls for bank capital transparency


Posted on March 31, 2013

Andrew Bailey©Anna Gordon

Andrew Bailey, the incoming head the Prudential Regulation Authority

Banks should be required to make their individualised capital requirements public so that investors can see which financial groups have attracted regulatory concerns about risk and why, says the UK’s new top financial watchdog.

Andrew Bailey issued his call for transparency just before taking the helm of the new Prudential Regulation Authority, which will supervise the safety and soundness of 1,700 banks, insurers and large investment firms from Tuesday.

    His proposal would lift the lid on decades of tradition that have seen bank supervisors work behind the scenes to make individual lenders safer without ever telling the public of their concerns.

    Under the incoming Basel III global banking rules, all banks must meet public minimum requirements for capital and liquidity, but national supervisors can then pile additional “Pillar 2” requirements on individual banks to address particular risks.

    For decades, this process has taken place privately, with banks and regulators forbidden from discussing it. Investors have had no way of knowing why a particular bank has a core tier one capital ratio higher than the minimum: 7 per cent of risk-weighted assets under Basel III rules. The bank’s management may simply be conservative, but it might also be under orders to carry more capital because regulators think it has been doing a lot of extremely risky lending.

    Mr Bailey told the Financial Times that Pillar 2 information should be made public as part of broader moves to make it easier for analysts and investors to understand and compare bank balance sheets.

    “I would do it. . . It is the logical consequence of where we’re heading to,” said Mr Bailey. “If you only disclose on Pillar 1 . . . you’ve given half the story. The history of supervising is that it’s a very secretive activity, because . . . it’s commercially highly confidential, and yet, if you go entirely down that road, what you lose is accountability. I think we have to be more transparent.”

    Mr Bailey would need to convince other regulators to go along with his plans – particularly outside the UK. But global regulators are already moving to greater disclosure in other areas, including liquidity, “leverage”, which measures total borrowing, and the composition of capital. Mr Bailey said that, in a year, “I hope we’ll be further forward, and disappointed if we’re not.”

    The Basel Committee on Banking Supervision, which sets worldwide standards, is also pushing for more disclosure and more limits on how banks use models to measure risk, in another effort to make institutions easier to compare.

    This is a move that Mr Bailey thoroughly supports, in part because of his long experience as an economist. “If you go back 20 or 30 years, people were developing models which they thought were in some sense ‘right’, in inverted commas. Now we know that we’re not right. We’re never right.”