He outlined three main myths propagated by the banking lobby. The first was that reform, principally the demand for larger loss-absorbing capital buffers, was a choice “between safety and growth”. “The banking lobby would have us believe that higher capital requirements and lower leverage will damage economic growth and retard the recovery,” he said. “Bankers have exploited this fear.”
Mr Jenkins claimed that the argument was false because more capital would not limit the amount of lending a bank could do, but would make it safer and therefore lowered its funding costs. Banks have claimed the opposite was the case due to their adherence to “return on equity” (RoE) targets, which ignore risk.
The second myth was that unless RoE was high, shareholders would not invest and capital could not be raised. Mr Jenkins dismissed the claim, saying: “The prospective investor is no longer interested in promises of short-term RoE, he is interested in achieving attractive risk-adjusted returns.”
The third myth was that governments cannot afford to over-regulate for the risk of losing financial centres. However, he said: “In a world of increased risk awareness, letting your banks off the capital hook will likely damage not enhance their ability to compete.”
Mr Jenkins also suggested that banks should be subjected to far higher capital and leverage ratios but fewer complicated rules in return.