13th May 2014 by The Harried House Hunter
Today sees a speech by Sir Jon Cunliffe of the Bank of England on the subject of banks being too big to fail. For a man that many will not of heard of he has a lot of jobs and apparent influence.
Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulatory Authority Board.
Mind you if you look at his track record he was exhibiting his influence in Whitehall at HM Treasury as a Managing Director of first Financial Regulation and then Macroeconomic policy until 2007 when he went to the Prime Minister’s Office. How did that work out? Did anything then happen in these areas? Apparently nothing untoward according to the British honours system as he was awarded a knighthood in December 2009 after the economy had plunged into a deep recession and the system of financial regulation had been exposed as a failure. I wonder what title he would have got if the policies had succeeded?
Also the appointment of a career civil servant and especially one from HM Treasury is of course yet another nail in the coffin lid for the concept of the Monetary Policy Committee being “independent”. Indeed the lid is full of such nails these days there can be little wood left, and it does question the purpose of it as it is reduced to being yet another expensive Quango.
Whilst we are on the subject of expensive Quangos what is the purpose of the Financial Policy Committee filled as it is by people who failed to spot the last property boom? They seem determined to look the other way this time around too as they chant the mantra of macro prudential policies. The same macro prudential polices which were abandoned in the past due to their lack of success! Perhaps they are hoping that the short attention spans of the modern era will at least mask that fact.
I have to confess that as soon as I hear about the appointment of Sir Jon Cunliffe he immediately became associated in my mind with Sir Frank Gordon from the Yes Prime Minister series.
The opening salvo could have been better chosen for a day when Chinese monthly industrial production growth was the lowest for 5 years and Estonia declared a year on year rate of economic growth of -1.9% whilst a survey on the German economy showed the worst result for over a year.
Advanced economies seem set on the path to recovery.
I do hope he was more tactful with countries like Estonia when he was our Permanent Representative to the European Union in 2012 and 2013! At least general agreement can be found for this bit.
It has been a long, hard slog to get to where we are
Although exactly which part has been a long hard slog for Sir Jon remains open to interpretation.
It did not take long for the excuses for inaction to emerge.
And the process of designing, agreeing and implementing that change is long and complex. I make no apology for this. The financial crisis was not a simple and short-lived episode. Nor can the response be simple or quick.
We do at least get a critique of Sir Jon’s past career although it is not put quite like that.
It is pretty obvious now that we went into the crisis with a high risk, highly interconnected banking system that had dangerously thin levels of capital and liquidity….the authorities also lacked the tools and the options to deal with failure once it occurred,
Where do we stand now?
Here is a confession of utter failure by the UK authorities on the subject of too big to fail.
In the UK, the largest six banks and building societies now account for 80% of the outstanding household and corporate lending, up from 65% at the start of 2008.
Sir Jon is quieter on the subject of his own involvement in this as for example the disastrous merger of Lloyds Bank with Bank of Scotland is described as a “hasty shotgun wedding”but we then move on with no reference to his own role in the Prime Minister’s Office back then. Perhaps that is why the bank bailouts are described as being “with little option”. Although the consequences of them are still with us.
Today, the government’s stake in RBS, equivalent to economic ownership of a little over 80% of the group, is worth around £31bn, a loss of over 25% on the funds injected.
Also there has been the impact on the wider economy.
The damage to economies generally from a financial system on long lasting life-support has been deep and wide. In the UK, five years later the economy is still smaller than before the crisis. Around half of a million more people remain out of work.
What can we do now?
The obvious solution is immediately rejected.
Others argue that regulation cannot hope to lower the probability of failure. With greater resources, the banks will always be one step ahead and find new ways to game the rules.
So if we are not allowed to make the banks smaller and if we are forced to employ well paid regulators like Sir Jon we of course need new regulations to keep them looking busy! We then get told we need to travel two roads.
I believe regulation can be effective in reducing the probability of failure.
With a zero-failure regime neither feasible nor desirable, reform is also underway to reduce the impact of failure as well as its probability…….The key is to be able to recapitalise a failed group safely, quickly and credibly by bailing in the group’s uninsured, unsecured creditors, such as debt-holders.
Apart from the conceptual flaws displayed here there are also operational and practical ones. Back in 2008 a rights issue of £12 billion by Royal Bank of Scotland was rightly perceived as enormous but in a few short months it was gone apparently without trace. So how far will this go?
It actually mandates that 8% of a bank’s liabilities must be bailed in before there can be any recourse to public money or industry financed resolution funds.
We do get a mention of something which apart from this blog gets very little mention the derivative contracts which banks entered into in the pre (and I fear post) credit crunch era.
Derivative contracts, in their current form, are a potential show-stopper here.
In many way this is quite a confession! But I fail to see how the solution proposed below will fix matters.
Drawing up a revised standard for derivative contracts is just the first step; the next and harder step is effecting a move of the hundreds of trillions of dollars of derivatives onto a revised set of contacts.
How exactly as we consider the image of a fish out of water?
After reading this my suggestion is that you advise your sons daughters, grandsons and granddaughters to become lawyers.
Nowhere was failure more disruptive than for the liquidation of Lehman Brothers….More than five years on, the liquidation is still not yet fully complete. Fees paid to the administrators have, so far, totaled more than $2bn.
It seems that jobs for life do still exist as that is the second category of them we have come across today.
Also there are troubling echoes of 2007 as we observe asset price inflation running rampant again. We have house price rises in the UK and today the FTSE 100 has done this. From the Wall Street Journal.
Bulls were back in Europe today as the FTSE 100 set its sights on its all time high of 6950.60, a level last reached in December 1999, after hitting its highest intraday level since January 2000 at 6877.39 earlier this morning.
There is much to consider here and the first is that some six years into the credit crunch our regulators are telling us that their response is still a work in progress! I am reminded of my post that regulation is doomed to failure and also of the fact that the Vickers Report does not fully apply until 2019, assuming it ever does. Is there anywhere else where such tardiness would be tolerated?
The problem with such can-kicking which some may prefer to see as well remunerated tyre-kicking is that there are plainly still problems with our banks. The retreat from investment banking by firms such as Barclays have many of the features of a rout and we keep getting nasty surprises from Royal Bank of Scotland and the Co-operative Bank. I do hope that there are no more collapses before our regulators are ready. Under the structure proposed I doubt that we will ever see this.
we will finally be able to say with confidence that no bank is too big to fail.