Professor Jagjit Chadha: Do UK banks need more capital?

Written by Professor Jagjit Chadha Sunday, 02 December 2012 11:37
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The Bank of England’s November 2012 Financial Stability Report has made the case for UK banks to shore up their levels of capital, perhaps to the tune of up to £20-50bn according to the FT.  
Three arguments seem to have made:
(i) banks may have to pay fines because of “misbehaviour”;  
(ii) provisions for expected losses need to be made and
(iii) risk weights may not be appropriate, in the sense that the weights applied may under predict risk. 
Rather predictably commercial banks have complained about the new requirements arguing that they want more certainty about capital targets.  I am not quite sure that financial institutions, whose basic role is to price payoffs in uncertain future states of nature and allow people to write contracts for smoothing consumption and investment decisions over those uncertain futures, should be calling for certainty otherwise their very rationale seems to me to disappear in a puff of full information.
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