Monday, September 13, 2010
The long and the short
Posted by David Smith at 02:30 PM
Category: Thoughts and responses

The agreement at the Bank for International Settlements (BIS) on new capital requirements for banks is a significant development. Banks will be required to increase their minimum common equity requirement from 2% to 4.5% and also be required to hold a capital conservation buffer of 2.5% "to withstand future periods of stress" bringing the total common equity requirements to 7%. Will it hamper the banks' ability to lend?

It will depend on the extent to which the adjustment period - a total of eight years - is enough. Certainly the new rules will reduce the stock of lending relative to capital. Handled properly, they should not mean prolonged lending starvation. Bank share prices are up on the news. More details here.

As for the short run outlook, the European Commission thinks the UK economy will continue to grow through the fiscal tightening. It has revived up its forecast for this year from 1.2% to 1.7%. It thinks the European upturn in fragile but doesn't expect a double dip. The forecast is here.