Politicians and regulators must appeal directly to institutional investors if they are to break the paralysis in the banking sector, the chief executive of Standard Chartered has warned.
Peter Sands, who played a behind-the-scenes role in drawing up the framework for bailing out Britain’s banking industry, said shareholders were encouraging banks to hoard capital at the same time regulators and politicians were trying to restore the flow of credit to the economy.
“The policymakers need to engage with the providers of capital to the banking system, rather than just talking to the banks, because ultimately you need a convergence in expectations,” he said in an interview with the Financial Times.
“They need to think about the way they set and talk about capital levels – not just as a technical regulatory exercise, but also a communication and market-
His comments come as banks on both sides of the Atlantic are facing intense political pressure to keep lending in spite of concerns among investors about their capital reserves, the deteriorating economic outlook and a continuing shortage of funding in the wholesale markets.
They echo calls by other executives such as Eric Daniels, chief executive of Lloyds TSB, for a debate about the appropriate level of capital for banks in a recession.
Capital injections have boosted banks’ capital reserves, and regulators believe they should now allow their capital ratios to fall as the economic downturn bites. However, investors are putting pressure on banks to maintain higher reserves. Mr Sands said when faced with diverging expectations between regulators and investors, they “will always manage to the higher of the two”.
Pressure from investors was one reason StanChart last month launched a £1.8bn rights issue, which closed yesterday, to boost its capital reserves. The company early today said that it had received acceptances for 96.95 per cent of the shares offered.
Mr Sands also signalled that the costs of the capital the British government has injected into the banking system risked having unintended consequences.
“The pricing of these markets at the moment is such that you’re better off de-leveraging than you are raising capital,” he said.
Mr Sands also pointed out that injecting additional capital into banks was not much use unless they had access to funding to support new lending. “Incremental capital is only so useful in terms of leveraging growth if you don’t have liquidity. Because it’s the liquidity that enables you to actually leverage up capital.”