Meanwhile, in a salutary reminder of the potential for just such systemic shocks to keep on reverberating, it was revealed that the Irish economy slipped back into recession at the end of last year with a drop of 0.2% in GDP in the final quarter following on from a 1.1% fall in Q3. It’ a major blow to the Irish government, whose draconian austerity plan had seemed to be bearing fruit earlier in the year. Irish Central Bank governor Patrick Honohan is now expected to ask the ECB for a delay in the payment of 3.1bn euros to the former Anglo-Irish Bank, due as part of the government rescue package.
So it’s easy to see why the BoE is eager to avoid a repeat of that kind of thing over here. ‘The committee remained concerned that capital was not yet at levels that would ensure resilience in the face of prospective risks,' the FPC said. 'It therefore advised banks to raise external capital as early as feasible.’
While most of the banks concerned probably realise this already, having yet another bunch of technocrats draw attention to it is likely to raise their bosses' blood pressure a notch or two. There is nothing that the ‘masters of the universe’ like less than being told what to do, after all. And ‘external capital’ is not that easily come by these days.
The FPC – one of a new breed of watchdogs expressly intended to guard against a repeat of the kind of unanticipated systemic risks that got us into this mess in the first place – will also have teeth. As of next year it will have legal powers to order banks to act in the interests of maintaining global stability. Among the powers it has requested are the ability to vary banks overall capital buffers, and to set capital requirements for specific lending activities in order to pre-empt bubbles – for instance commercial property or high loan-to-value mortgages. It also wants to be able to change banks overall leverage ratio – the amount they can lend in total against a given capital base.
All of which sounds eminently sensible in theory. But translating regulatory theory into practice is never easy, and in the complex, fast moving and abstract world of modern banking it may prove to be a very tall order indeed.