King laid out three reasons the Bank (capital B) thinks the banks (small b) aren’t quite managing as well as they say: first, possible understating of expected future credit losses; second, unforeseen costs from previous behaviour; and third, an overly optimistic view of risk in working out their capital ratios. If the banks were the country’s teenage son, this is them returning to the parents after borrowing a ton for a Friday night out, going: ‘Can I have £2k? I reckon that’s what it’s going to cost to get your car fixed. Plus I’ll need £500 for the speeding fine.’
The Governor must be happy he’s handing over this mess to Mark Carney soon, although he does reckon the problem is ‘manageable’ – as long as we get down to sorting it out straight away. It’ll be Carney’s job to make sure the banks have enough capital to support the economy, as part of the greater regulatory powers that the Bank of England acquires in taking over the FSA next year. Banks don’t just need to support the economy, however, they need to have enough cash to deal with all the charges for their previous errors. Note the HSBC and Barclays penalties for money laundering and the alleged rigging of the Libor rate, and the billions set aside to cover claims for mis-selling of PPI.
The conclusion of the Bank’s Financial Stability Report is to press the FSA to conduct a 'proper valuation' of bank assets. They’ve even asked for an ‘honest’ assessment of any hidden surprises –but that may be pushing it. Even if the banks did show a sudden desire to be 100% open, you get the distinct feeling nobody really knows the extent of the problem. Even the Bank’s reassessment is based on 2011 data.
King has at least insisted that taxpayers wouldn’t be forced to plug any further gaps. ‘We're not saying, tomorrow morning, be out there with the collecting tins,’ he said. Next week, however, could be a different story…