Jon Cunliffe: Regulatory reform and returns in banking Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, at Chatham House, London, 20 October 2014. *  *  *  On 13 October 2008 – just over 6 years ago – the UK government injected nearly £ of public funds to stabilise Royal Bank Scotland and Lloyds Banking Group. Parts of both banking groups had started the year in a precarious position, with swollen, highly levered balance sheets and a reliance on short-term wholesale funding. By October, losses had left them dangerously undercapitalised. Absent a resolution regime for dealing with failing banks, and given the importance of these two banks to domestic lending, the government was left with no choice but to inject public funds, bailing out the banks’ creditors. In the intervening 6 years the landscape of banking has changed beyond recognition. Some of this is due to a very different approach to regulation and supervision. Some is due to a very different commercial environment. And most important, there has been a sea change in public attitudes towards banking and bankers. Bankers should not expect to be popular. But the outburst of public anger that accompanied the crisis and its very painful and protracted impact on the real economy – families and jobs – has not abated much. The latest polls put public trust in bankers at nearly the bottom of the class – only marginally above politicians.
But it is less clear what the changes on the other side will be: how banks will respond to the new regulatory and economic environment. There is much soul searching in the industry about what the future looks like. The reform programme and returns in banking The most marked change in this new landscape is the much greater amounts of capital in banks and as a consequence the much reduced level of leverage. Headline levels of required capital have increased. And the risk associated with many types of assets and business activities has been fundamentally re-appraised. For the largest firms, the equity levels required will be around 7 times higher than before the crisis on a risk weighted asset basis. 4  BIS central bankers’ speeches  Moreover, international standards will determine not just the leverage firms can carry on a risk weighted basis but also, when an international leverage ratio is agreed in 2019, the absolute amount of assets they can carry for any given level of capital. A number of major jurisdictions such as the US have implemented leverage ratio rules in advance of that; the FPC will shortly issue proposals to do so in the UK. Lower leverage will reduce the returns that banks’ shareholders make, relative to pre-crisis. But it also means that banks will be safer investments which should also reduce the returns that investors require.