LONDON (MNI) – Banks should have a lot more equity capital than
they have held in recent years and also more than the target levels set
out in the latest international accord, Basel III, according to a Bank
of England working paper.
The paper, co-authored by Monetary Policy Committee member David
Miles, looks at optimal bank capital levels and concludes bank equity
capital has been persistently too low and, contrary to the view
expressed by some bank lobbyists, raising the levels will not drive bank
lending rates sharply higher.
“We find that the amount of equity capital that is likely to be
desirable for banks to hold is very much larger than banks have held in
recent years and also higher than targets agreed under Basel III
framework,” the paper says.
It dismisses the argument sometimes made on behalf of the banking
industry – that borrowers will suffer if banks are forced to hold a lot
more capital.
“We conclude that even proportionally large increases in bank
capital are likely to result in a small long-run impact on the borrowing
costs faced by bank customers,” the paper says.
“Even if the amount of bank capital doubles our estimates suggest
that the average cost of bank funding will increase by only around 10-40
basis points,” the paper adds.
Basel III sets a minimum target for common equity capital at 7% of
banks’ risk-weighted assets.
“Our analysis suggests clearly that a far more ambitious reform
would ultimately be desirable – a capital ratio which is at least twice
as large as that agreed upon in Basel would take the banking sector much
closer to an optimal position,” the paper says.
–London Newsroom 0044 20 7862 7491; email: drobinson@marketnews.com
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