Carney exaggerates capital claims

It is a good job the Bank of England is not covered by laws against misleading advertising claims that apply to peddlers of New Age remedies. Mark Carney said on Tuesday he had raised lending capacity in the UK “by up to £150bn” to “support jobs and growth” following the Brexit vote. That sounded great. But so would the blurb for a potion that promised to banish stress, back pain and unsightly hair.

In both cases, efficacy may prove limited. First, the governor used an old standby of development economists — a fat multiplier — to generate a big economic benefit number. His starting point was the slim £5.7bn countercyclical capital buffer imposed on UK banks such as Lloyds and Barclays from March, which he has cut to zero. Mr Carney assumes this easement is worth 25 times its value in loans at a target leverage ratio of 4 per cent.

Second, the George Clooney of central banking is rolling back a surcharge that cost big banks little grief in the first place. They expected to cover it simply by reclassifying equity previously held under Prudential Regulation Authority rules.

Third, for the ointment to work, the patient would need to apply it to the sore spot. Mr Carney introduced the countercyclical buffer to cool down an overheating housing market. Borrowers may simply shove liberated capital back into this bottomless pit, rather than using it for something useful, such as export finance.

Fourth, and most crucially, it takes two to tango. As Peter Richardson of Berenberg puts it, the chancellor “cannot generate solvent demand for credit”. Would-be borrowers, especially shrewd private business owners, will mostly avoid investing until the economic picture becomes clearer.

At least Mr Carney is reducing banks’ capital costs as demand threatens to flag, rather than raising them, as happened in the last recession. The nadir of that caper was the failed Project Merlin lending initiative in which the banks halfheartedly participated. This was no more capable of magic than the great, bad conjuror Tommy Cooper.

Houses of correction

The Daily Mail recently accused the FT of being “relentlessly negative” about Brexit. Perhaps the tabloid should now turn its fire on analysts of the kind that quizzed Persimmon chief executive Jeff Fairburn about a trading update. It is the mood of City folk that columnists such as Lombard have in part been channelling.

The boss of the big housebuilder acknowledged there had been a referendum. But this was as close as he got to running around shrieking “Help! We’re all gonna die!” First-half trading had been strong, he said, with completion volumes rising 6 per cent to 7,238 and the average selling price by the same percentage to £205,500.

The analysts sounded incredulous. Surely tumbleweed was bowling through Persimmon sites as sales reps chain-smoked roll-ups between trembling fingers? Not really, Mr Fairburn confessed. Trading was good last week. Then he vouchsafed words to gladden the evil hearts of us doomsters. There had been a “slight” increase in cancellations.

The shares fell 7 per cent, taking the drop to 35 per cent since the Leave vote was announced. That fall suggests investors think brokers have under-egged estimates of a 3 per cent slide in average house prices. The slump in the 2008 property crash was 15 per cent.

Persimmon stock has not even reverted to its 10 year average as measured by price to book value. One might hazard that shares in housebuilders will drop further as confidence weakens and banks become pickier in granting mortgages. But one would not want to be accused of talking the country into a recession.

Metroland martyrs

Southern is the rail company that makes people who grew up in the seventies feel young again, but in a bad way. There are no flares, glam rock bands or space hoppers. Instead there is a shambolic service proffered by belligerent staff under managers that ministers are failing to hold to account.

Around 1m people struggle into London daily via the Brighton main line. Delays and cancellations are often as frequent as trains that run on time. On Tuesday, Southern cut 341 services from its daily complement of 2,242.

Majority owner Go-Ahead, a listed group, should perhaps change its name to Go To Hell to capture its apparent attitude to customers. It blames rebuilding at London Bridge. Curiously, South Eastern, which shares the station, has suffered far less disruption.

Greater guilt is borne by conductors who have been throwing sickies. But the biggest culprit is a franchise where the operator works for a fixed fee. That leaves the state to underpay, the operator to underperform and passengers to suffer the consequences.

The government — when we get one — should fire Southern and redesign the franchise to include incentives.

jonathan.guthrie@ft.com

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Carney exaggerates capital claims
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Carney exaggerates capital claims
BDC September 2022 issue - 296

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