As the credit crunch has developed one of the themes of this blog has echoes of the Hippocratic oath taken by doctors. This is that our leaders and authorities seem to chant themselves to sleep at night saying “thou shalt do no harm to the banking sector”. Such thoughts have made many wonder if our form of government these days should be described as a bankocracy! However you look at it when there is a choice between general well being and banking well being it is the latter that the “too big to fail” strategy has chosen to pursue.
The failure of regulation
Many have hoped that regulation and regulators would step in and fill the breaches and voids created by the credit crunch. However I never felt that this would be so as for example the Financial Services Authority in the UK has always been a weak and insipid organisation in spite of employing around 4,500 individuals. Maximum expense and minimum effect seems to be its modus operandi. Also there is the concept of “regulatory capture” where the regulator becomes more interested in the welfare of its charges than the wider population it is supposed to protect. Of course the former head of the FSA Hector Sants has just demonstrated part of this by taking an apparently very well paid role at one of his former charges Barclays. This at best damages confidence and at worst is a type of corruption.
My argument that we cannot rely of regulation to protect us has also gained support from the litany of scandals that have affected the banking sectors of the world. The UK sadly has been in the van of this with the LIBOR (London Inter Bank Offered Rate) scandal,re-hypothecation (using the same money more than once) and money laundering for drug cartels the main problems. One could satirise the FSA as being like Admiral Nelson with its blind eye to the telescope except that Nelson used such a ruse to good and not bad effect.
Just to rub it in the man in the UK responsible since 2008 for such a litany of failure is now Sir Hector Sants which leads to suspicions that this is a reward for failing to find any wrongdoing.
The Basel Committee on Bank Supervision
This body has previously published guidelines which from next month was supposed to begin tightening capital rules for banks and from 2015 was to apply the full new Liquidity Capital Rules. So far so good you might think as these rules were designed to help prevent another Lehman Bros type collapse. As this collapse was calamitous for the world financial system this would be described by the book 1066 and all that as a “good thing”. If you have read about this it has usually been described as the Basel 111 plan or system.
Indeed at this point you might even say that regulation was not doing to badly and even self-regulation as this body is made up of members from what it calls the worlds 27 major financial centres or what the rest of us calls banks. As part of the Bank for International Settlements or BIS it is part of what is called “the bankers central bank”.
A change of course
Unfortunately such moves are bad for bank profits or rather as this committee now chooses to present it their ability to lend. Accordingly there has been plenty of lobbying by banks to their own committee! No moral hazard there obviously!
Suddenly we have seen some changes of course.
Capital and Liquidity aren’t what they used to be
The changes to the definition of the LCR, developed and agreed by the Basel Committee over the past two years, include an expansion in the range of assets eligible as HQLA and some refinements to the assumed inflow and outflow rates to better reflect actual experience in times of stress.
Apparently the passage of time isn’t what it used to be either
Specifically, the LCR will be introduced as planned on 1 January 2015, but the minimum requirement will begin at 60%, rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019.
So “as planned” goes into my financial lexicon because that is not what they told us they planned at all, although of course many will suspect that this watering down was always the true (hidden) plan.
So we see that High Quality Liquid Assets (HQLA) are, ahem, not what they used to be as look at what they include now.
residential mortgage backed securities
Yes the same ones which caused such damage around the Lehman Bros collapse! Yes the same collapse which these rules are supposed to prevent ever happening again. Indeed it is worse than that as the problem securities were supposed pre-Lehman to be of AAA rating and under these rules they only have to be rated as AA!
Also a minimum is not actually a minimum either
during periods of stress it would be entirely appropriate for banks to use their stock of HQLA, thereby falling below the minimum
So what is supposed to protect us against stresses in the banking system will not apply when the banking system is under stress. Sometimes you really couldn’t make it up!
They are not finished yet
As we review what is planned now this statement about the future looks very ominous to me.
the Committee will continue to develop disclosure requirements for bank liquidity and funding profiles.
I think that the word “non” was missing from that sentence and will let readers decide where it should be.
Mervyn King is in the van
Yes the current Bank of England Governor is the Chairman of the body which has just approved all this and those who follow UK economic policy will be justly nervous about this widening of his role. His words are -typical for him- such a misrepresentation of what has actually taken place here.
Importantly, introducing a phased timetable for the introduction of the LCR, and reaffirming that a bank’s stock of liquid assets are usable in times of stress, will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery.
The goal posts were supposed to be preventing another crash not financing a recovery in another example of a classic “Merv the swerve” to the truth.
Sir Humphrey Appleby
The apocryphal civil servant from Yes Prime Minister would be very happy today if he existed in real life as what has just happened is a copy of one of his strategies. Always put real change far enough away that by the time you get there and change it back most people’s priorities have moved on and they will not notice. Or what has become called kicking the can into the future.
You may notice that the current strategy has now kicked this poor battered can at least twice.
Bank share prices tell us the truth
In spite of the general UK equity market being weak today we see that the highest riser is Barclays Bank which is up 10p or over 3%. Germany’s Deutsche Bank is also up by over 3% as is BNP Paribus of France and Unicredit of Italy. I think that the message here is very clear about what has taken place.
I am afraid that what has taken place here is as predictable as it is disappointing. As to regulation I am reminded of the Latin phrase.
Quis custodiet ipsos custodes?
Who guards the guardians?
There is another way
Back on September 27th 2011 I made the case for another strategy to be applied.
My argument today is that we have failed over the credit crunch to undertake what was the most important measure once interest -rate had been cut and fiscal stimuli were in action. We should have then begun to reform our banks and we would then not find ourselves in a situation where we have wasted much of the last 3 years. Indeed I would argue that with bail out after bail out the influence of the banking sector has grown and not weakened.
We need to switch from “too big to fail” to “too big to save” as a philosophy and until we do I fear our economies will never properly recover.