“I don’t think we can be clearer than that”

written by Angela Knight on 02/12/2011

“I don't think we can be clearer than that”

This is a quote from the Governor of the Bank of England at his press conference yesterday. Sir Mervyn King was presenting the Financial Policy Committee’s Financial Stability Report, and warned particularly about the need to prepare for a further deepening of the eurozone crisis.

His opening remarks were:

“Faced with a crisis of the euro-area system, we are seeing at first hand the costs of financial instability.”

First among his recommendations on how the UK should be preparing itself for a worsening eurozone crisis was this:

"... if earnings are insufficient to build capital levels further, banks should limit distributions and give serious consideration to raising external capital in the coming months."

“This recommendation does not reflect a view on the Committee that the current level of capital in individual UK banks is insufficient. Indeed, UK banks are better capitalised than many of their Continental peers. Rather, it reflects a judgement that it is sensible and desirable to raise capital buffers further in order to improve resilience in light of the continuing threats to UK financial stability, while at the same time enhancing the capacity of banks to provide credit to the wider economy. That is why the recommendation is framed in terms of levels of capital and not capital ratios.”

His full opening statement is here. So far, the message was clear: the UK’s banks are in a better position than most to weather the crisis, but we should all prepare for the worst, every way we can.

But then he started a press conference (transcript here). Reporters were keen to pin him down on this first recommendation – that “banks should limit distributions and give serious consideration to raising external capital in the coming months.". Several reporters asked Sir Mervyn if this meant bonuses in banks should be stopped. He said:

“Well, the Financial Policy Committee has worded its recommendations carefully. We're not in a position to issue directions and we have made it very clear that we think that banks should be taking the opportunity to do whatever they can to raise levels of capital in order to improve their resilience. I don't think we can be clearer than that.”

Thereafter the story degenerated into only one about bonuses, therefore veering away from the main fundamental point - the Governor’s remarks that we have a eurozone crisis on our doorstep that will hurt the UK unless the eurozone countries take immediate action.

I know that pay in the financial services sector is a significant issue. Having been in the hot seat at the BBA since the financial crisis began, I could hardly believe otherwise. We’ve had two years of regulation on bonuses, a one-off bank payroll tax succeeded by a levy on bank balance sheets, and a continuing chorus of public concern – well-informed criticism as well as unfocused anger. Pay is undoubtedly a significant issue. But it is not the only issue, and it is not an issue which is likely to affect in any significant way the urgent need to resolve the eurozone crisis.

Bank bonuses are shrinking – all of the indicators are that we are no longer in big bonus territory. Expectations are that the coming bonus season may well show a significant reduction in the amount of remuneration paid out. We know this is an emotive and divisive issue – perhaps the greatest issue the banks face in their work to rebuild confidence and trust among their customers.

But we should not let this blind us to the imminent concerns voiced by Sir Mervyn yesterday – the storms which may come in our direction from the crisis in the euro area.