Lloyds boss: Forcing banks to hoard capital is slowing UK growth
The boss of Lloyds Banking Group has called on the government to take its deregulation mission further to ramp up economic growth.
Charlie Nunn, chief executive of Lloyds Banking Group, welcomed recent regulatory progress, including the Chancellor’s Leeds Reforms package, but added “they are just at the start – there is more to do”.
“The hard reality is the financial system deleveraging, which results in a massive deleveraging and de-risking the whole of society, has slowed down the UK in the race over a decade, as well as other factors as well,” he said.
Deleveraging refers to when banks are forced to reduce risk and pay down debt – often by hoarding capital instead of lending. This trend ramped up after the global financial crisis in 2008 to prevent future financial collapse.
In the aftermath of 2008, Basel III rules – international banking regulations developed in response to the crisis – drastically increased bank stability by more than doubling the minimum core capital (CET1) ratio and introducing strict mandatory buffers to curb excessive risk-taking.
Bank of England takes chop to capital rules
But over the last year the tide has begun to turn on post-crisis financial regulation with Bank of England Governor Andrew Bailey stating it was a “sensible reflection of conditions” to ease capital lending requirements on Thursday.
The Bank eased UK lender’s capital holding rules to 13 per cent – a one percentage point shift – reducing the amount of risk-weighted assets that must be funds that can absorb unexpected losses without putting customers or the financial system at risk.
Nunn said deleveraging had prevented “the financial services system doing what it does best, which is supporting businesses, customers and large institutions from appropriately putting capital work and supporting the economy.”
Following the latest Financial Policy Committee (FPC) report, Bailey was questioned whether regulation was ‘overdone’ in the fallout of the 2008 crisis.
He responded the banking sector had come through “very substantial” economic shocks “robustly”.
He later added: “We learn from experience.. that’s why we feel comfortable making these changes.”
The Bank took the chop to capital rules after the UK’s top seven banks, Lloyds, Barclays, Natwest, Santander UK, Nationwide and Standard Chartered, breezed through stress tests with the conclusion the lenders were strong enough to continue lending through “a severe but plausible” economic shock.