Departing BoE King Calls For More Stimulus as PRA Reveals £27.1bn Gap

In his final big speech at the Mansion House before leaving as Bank of England (BoE) governor at the end of the month, Mervyn King, said that the economic recovery in the UK is still not yet secure. He called for more stimulus packages, continued low interest rates and support for the banks, as calls for RBS to be split into a good and a bad bank increased, and a £27.1bn ($41.8 billion) capital funding shortfall was revealed in the nation’s banks by the Prudential Regulation Authority (PRA).   

In his last address to the annual Mansion House gathering of financiers in the City of London, before the ex-head of the Canadian central bank Mark Carney comes in as the new head of the BoE, King said a “modest” recovery in the UK is underway but “growth is not yet strong enough to reduce the considerable margin of spare capacity in the economy.” He also warned that more measures needed to be put in place in order to ensure that the UK’s banks do not pose a further threat to the taxpayer, reflecting his strong belief that the strengthening of the banking sector post-crash is still not complete. His comments are likely to reinforce the risk averse approach of most European corporate treasurers at the moment, as is his continued support for more quantitative easing (QE) in the UK which – although good for corporate bonds – is in fact a sign of economic weakness.      

Unemployment was “unnecessarily high”, King went on to add in his mid-week Mansion House speech, and was now a bigger threat to the UK economy than inflation. Mervyn King is leaving the BoE at the end of this month after 20 years at the institution. He also welcomed UK Chancellor, George Osborne’s, plan announced during his Mansion House address to sell off the UK government’s 39% stake in Lloyds Banking Group before the next general election in 2015, which is designed to get the bank back into the private sector as soon as possible.  

Capital Shortfall at UK Banks as RBS Split Advocated 

King’s calls for a further strengthening of the banks was inadvertently supported by the new PRA regulatory body, which in an unrelated report this week said that UK banks “must raise a further £27.1bn in capital”, to cover any upcoming risk, after the body said it had found this “gap” in their balance sheets after the latest assessments.  

Some £13.6bn of the total shortfall figure is attributable to the Royal Bank of Scotland (RBS) alone, 81% of which is owned by the UK government, which despite its wishes remains unable to return this bailed out bank to the private sector – indeed the old idea of splitting it into a ‘good bank’ and a ‘bad bank’ has resurfaced this week with the UK Chancellor now admitting it as a possibility after previously discounting the idea.   

Lloyds Banking Group and Barclays ‘contributed’ £8.6bn and £3bn respectively to the capital shortfall at UK banks, while the Nationwide, one of the UK’s largest mutually-owned building societies needs to find just £400,000. 

At the start of the week the Co-operative Bank, another mutual but one burdened with debts after its takeover of the failing Britannia Building Society in 2009, announced it would seek to plug its £1.5bn shortfall by issuing a bond-to-equity scheme, lessening its mutual member-owned status as it turns to the financial markets for support. The Co-op had been due to takeover 632 bank branches from Lloyds Banking Group, but had to pull out of the deal due to its liquidity struggles and a reduction in its credit rating by Moody’s to junk status.  

HSBC, Santander UK and Standard Chartered were all deemed healthy by the PRA.  

Reaction

Commenting on the idea of belatedly splitting RBS into good and bad banks, the director-general of the Confederation of British Industry (CBI), John Cridland, said: “RBS is already well down the road of restructuring, so the case for a split into good and bad banks feels like groundhog day to me. I don’t see how it would help taxpayers in getting their money back. A review [as announced by the Chancellor during his Mansion House speech] creates a period of uncertainty when the focus should be on business lending and growth, so it should be concluded swiftly with the Government acting decisively on its findings. 

The CBI is one of the UK’s leading business organisations, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. Cridland added that: “It’s in everyone’s interests, including business customers, to get Lloyds and RBS off the government’s hands and back into private ownership.”    

 

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