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By Owen Sanderson
LONDON, July 2 (IFR) - The public disagreement betweenAntony Jenkins and the Bank of England over cutting lending hasits roots in the PRA's own dithering over bank capital.
Jenkins, who for the past year has affected a mild-mannered,very un-Bob Diamond demeanour, warned last Friday that Barclaysmight have to cut lending to meet its 3% leverage target by theend of the year. This, in turn, was met by a chorus of politicaldemands not be held to ransom by the big banks, and anaffirmation from the Bank of England that a capital-raising planthat relied on cutting lending would not be acceptable.
But Jenkins was left with little option. The PRA appears tohave sprung the 3% leverage ratio out of nowhere. It was alwayssupposed to come in by 2018, giving banks time to meet itthrough retained earnings (or squeezing their own comp).
Now, it is suddenly vital, for reasons undisclosed, to getit done by the end of 2013. To give the regulators their due,perhaps hosting a 40x levered global investment banking businessis not the safest thing to do. But a 33x levered globalinvestment banking business hardly looks much safer.
To meet the end of year deadline this fast, Barclays needsto raise equity or sell assets.
You might think it would be able to use sub debt to meet it.The EBA has specified technical standards for what AdditionalTier 1 is in the brave new world - how to write it down, how towrite it up, how to make sure it absorbs losses. It has donethis in full knowledge of the failure of pre-crisis hybrids, andexplicitly intended to design loss-absorbing instruments.
The PRA has to accept these rules. Indeed, the UK, withpossibly the largest and most experienced regulatoryestablishment in Europe, has been instrumental in preparingthem.
But what is the point if it then decides the new instrumentswill not be capital, opting for a strict definition of equity,rather than all Tier 1 capital?
CAPITAL OR NOT?
Additional Tier 1, under the new rules, is specifically acreature of risk-weighted regimes. The trigger it must have isat 5.125% of risk-weighted assets. But nonetheless, thewrite-down it will experience once triggered is real and just asvalid in a leverage ratio as a risk-based capital regime.
The distinction between risk-based and pure leverage ratiois about the asset side of the balance sheet, not theliabilities. It is hard to see why there should be anydistinction between the definition of going concernloss-absorbing capital between the two regimes.
But the PRA evidently thinks otherwise, so Barclays cannotissue hybrids to meet its "urgent" leverage ratio target. Thatmeans raising equity (while trading at 70% of book value) orshrinking assets. Jenkins, then, is wheeled out to apologise forbeing caught in a trap not of his making.
Barclays has shown itself willing to act early on capital,issuing two round of CoCos in Tier 2 hosts in November andApril. These are supposed to be "gone-concern" capital, but thewrite-downs are real and the triggers are respectable, at 7%.
Perhaps a gentle steer that it would need to meet a leverageratio of the PRA's devising might have encouraged Barclays to domore earlier. The Financial Policy Committee's Martin Taylor,formerly of Barclays himself, said that the Treasury SelectCommittee should not be "taken in" by claims from the banks thatthe leverage ratio was a surprise. But it is hard to read it anyother way.
Every public pronouncement suggested the leverage ratio wason track for 2018. Every part of UK bank behaviour suggests thatthese institutions were blindsided by the demand to raise CET1by the end of the year, or else.
Barclays, calculating its own leverage ratio in the April2013 IMS, came up with 20x. The PRA "found" an extra 20 turnswhen it did the numbers, possibly by counting derivativesexposures differently. Apart from providing an illustration ofjust how complex coming up with objective ratios can be, thisdoes not suggest an institution that knew what was coming.
EVIL AND COMPETENT
So who screwed up? Regulators are blaming Barclays, who didtoo little too late. Barclays, mindful of a somewhat tensepolitical environment, is blaming nobody. The regulatorymachinery has been changing rapidly, with architects of the oldregime, such as Paul Tucker, departing, and vastly enhancedregulatory powers for the Bank following the dissolution of theFSA.
Mistakes do happen in such environments. Barclays may havetaken a cue from one end of the regulatory machinery that itwants more gone-concern loss absorption urgently, and theleverage ratio could wait, only to have this order countermandedfrom on high.
Or regulators might have a grudge against Barclays. It isthe poster bank for the Libor scandal, proud defier of stateassistance and defender of universal banking. The increasinglypowerful Parliamentary Commission on Banking Standards couldalso have encouraged the PRA to act early.
Its first report, in December, said that the FinancialPoliticy Committee should have the duty of setting the leverageratio from Spring 2013, and that it expected the leverage ratioto be set significantly higher than the 3% minimum requiredunder Basel III - an odd comment for a backbench committee tomake to a nominally independent central bank, but a commentwhich may have been influential.
But the PRA ought to know better. Political interferenceshould not trump the logic of a consistent capital regime. Thereare sound, valid reasons to dislike and disavow contingentinstruments, but the PRA must do so consistently. (By Owen Sanderson; editing by Philip Wright, Alex Chambers)
