Mark Carney seems to prefer scalpels to sledge hammers. Forcing banks to hold bigger capital buffers, as the Bank of England governor did on Tuesday, is a finely honed way of reining in frothy consumer finance. But eventually Carney and his colleagues will have to push through the higher borrowing costs they keep warning lenders about.
If interest rates are the heavy machinery of economic management, the counter-cyclical capital buffer is more precise. It allows regulators to raise and lower capital ratios, thereby influencing banks’ ability to cope with shocks. Following last year’s Brexit referendum, the BoE’s Financial Policy Committee (FPC) lowered the buffer to zero. It has now lifted the ratio back up to 0.5 percent, and scheduled a similar increase for November. All in, the minimum amount of capital that UK banks have to hold will increase by 11.4 billion pounds by November 2018.The industry can cope with the demands: UK banks’ combined common equity Tier 1 capital ratio was 13.9 percent in March, and their combined leverage ratio is over 5 percent, well above the BoE’s proposed minimum of 3.25 percent. Shares in most British lenders closed higher on Tuesday.Even so, the FPC remains worried about signs of excess, particularly in car finance and credit cards. UK consumer borrowing jumped 10 percent in the year to April, far exceeding growth in income. Higher interest rates could leave borrowers struggling to service their loans, and lenders with higher bad debt.But warning about higher rates is no substitute for the real thing. It’s a decade since the BoE’s Monetary Policy Committee last increased official borrowing costs. Some rate-setters are getting itchy: three of the MPC’s eight members voted to raise rates in June, and while one is leaving, BoE Chief Economist Andy Haldane has hinted he may join them next time.On Tuesday Carney batted away accusations, voiced by departing MPC member Kristin Forbes in a speech last week, that broader post-crisis responsibilities – which include worrying about financial stability – had distracted the central bank from fighting inflation. Even so, the blunt tool of higher rates cannot remain in the box forever.
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