Banks 1 The World Economy 0

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.


This entry was posted in Banking Reform, Banks, Barclays Scandal, Financial crisis, General Economics, Scams, Sustainability and tagged , . Bookmark the permalink.
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  • forbin

    Hello Shaun

    It does seem as if this is all rigged doesn’t it ? Have I joined the Tin Foil hat brigade with out realizing it?

    to be honest I think our current crop of “leaders” bet the shop on the economy recovering and growth to cover up all this mess

    But as I’ve said before I’ve not seen anything thats been done to promote this – just the opposite a “modern ” democracy requires a heatlhy well paid middle class to support it

    all the signs are that we are going to a modern feudal system – elite rich and the rest poor .

    This is what you get with this type of Merve the Swerve and Hector ‘S house rewards scheme – pay for failure ! Peter principle at work ?

    Keep up the good spot light into this type of thing , Shaun, I need a dose of reality after the MiniTru sweet happy talk ;-)


  • MickC

    Spot on!
    The Vapours are still entirely appropriate-we have indeed turned Japanese, save that Japan still actually makes stuff people want to buy and the UK

  • anteos

    I do think you’re being slightly unfair here. The uk government and tax payer is

    addicted to debt. The banks previously pumped out credit recklessly and were brought to their knees. Now that the banks are being sensible (requiring large mortgage deposits, not lending to business’s which would most likely fail), they’re being pilloried again.

    Through their lax regulation the government might be encouraging the banks to start pumping out debt again, but I think they’ll maintain a lot of capital and continue to not lend. This could be seen as zombie banks holding back a zombie economy, but until we have de-leveraged, the economy won’t recover.

  • Patrick

    “…bought to their knees…”

    I can’t remember Fred Goodwin, Steven Hester, Hector Sants, Bob Diamond et al spending much time on both their knees. Maybe one knee in the case of Fred and Hector…

    So, institutions that were reasonably expected to be sensible when balancing profit and risk can’t be held full and totally responsible for then making the choices they did? The banks made poorly calculated short term decisions to lend to individuals who lied about their earnings to secure mortgages well beyond their reach. Other Banks then collected these debts together and missold them.

    Where does the assertion that banks are suddenly not lending to ‘risky’ businesses come from? Was that ever a problem in the recent bubble? The banks are trying to recapitalize, and in the process a tiny minority of asset rich individuals are making a killing, while the rest of the economy falls apart. For those who are paying down Tracker or low fixed rate mortgages, it’s great news, but the banks continue to lose future profits on this, and less money gets spent in the wider economy.

    I don’t see that given the basic rules of corporate law, there’s much that any one bank could or would do to help affect positive change. If I genuinely felt, for a second, that any CEO/Board/Shareholder Group WANTED to affect change, then, and only then they might have my sympathy, as it’s clear that they would have to fight against the BOE/Government to do so.

    Given the BOEs strategy to inflate away debt and avoid as much punishment/regulation as possible, and further, their willingness to reward failure, they’re clearly incapable of forcing the regulatory changes that Shaun so clearly outlines, and that this country so desperately needs.

  • JW

    Hi Shaun

    From the beginning it was always Bank bond/shareholders or the rest of us. Inevitable then really. The 0.1% will protect their wealth whilst the 99% drift downwards, the 0.9% are used to manage the process. Part of this is due to the macro forces at work, but its criminally exacerbated by the ‘financial warlords’ so well protected by the vampire squid.

  • DaveS

    Thats the question – can they suppress the middle class in a democracy ?

    Especially the new “middle classes” – lower income (& falling), service workers who’s wealth is almost entirely dependent on property.

    The housing ladder bribe worked for 3 decades. Now they have the recovery lie. When will they realise whats happened and start protesting ?

    But protest at what ? Will they demand BoE to raise interest rates to curb inflation – and hence default on their mortgages – don’t think so. They are debt slaves now.

    They will demand pay rises, not interest rate rises and our political leaders will give them. Why – because the BoE wants inflation and no-one wins elections promising to increase your mortgage and crash house prices.

    Now some economists think inflation is the solution (e.g. clever Mr Krugman). After all it sort of worked in the 70′s. But that was pre-globalisation and the UK was a very different economy.

  • Anonymous

    If there is no prospect of growth, then inflation is the answer. We are experts at inflation in the UK. Wait and see what the BoE engineers for the next couple of years. High price inflation and very low wage inflation. Debase the currency and the value of debts melts away before your eyes. Just in time to do it all again!

  • Anonymous

    They are also addicted to crazy house prices. No country can make a living by selling itself houses at ridiculous multiples of average earnings.

  • Anonymous

    I agree, the BoE is the problem, not any part of the solution. In fact, I can’t see any solutions being tried yet.

  • DaveS

    “High price inflation and very low wage inflation”

    Thats a recipe for riots – it won’t erode mortgages – in fact they will become harder to service with more income spent on food & energy. House prices would spiral downwards and with them GDP.

    No, I think they will overlook wage inflation – not Tory George (stuck with the old gospel) but man of the people Ed.

    In the 70′s wages trebled and so did house prices. My parents struggled badly to pay the rising mortgage rates but held on to the house. When IMF finally pulled the plug on inflation, they had practically no mortgage and felt wealthy for first time in their lives.

    This time they will keep rates low (no QE in the 70′s) and inflation will rocket. Probably impossible for IMF to intervene – our debts are way bigger than the 70′s. Pretty risky if you ask me but not if you are asset rich,

    Still no need to worry, these guys know what they are doing……

  • Anonymous

    Hi MickC
    Actually we run ourselves down on the exports side in the UK our real problem is that we have an even more voracious appetite for imports. Should the Yen continue on its current weak trend in 2013 and becomes sustained we will see how the Japanese economy responds and how it compares to our response to the 2007/08 depreciation here.
    Ironically in trying to stimulate inflation as a way out of their problems the Japanese may be turning British!

  • Anonymous

    Hi JW
    Talk of “warlords” makes it sound and look even more feudal does it not? I am a big fan of the Dune series of novels which projects a feudal structure into the far future. Perhaps the author was giving us a message that such a structure is man’s natural tendency.
    We badly need to reform our system of government along with our economy as democracy is in danger of failing.

  • Anonymous

    Hi Forbin
    Thank you, may I suggest that in these times your hat may need to be made of something stronger than tinfoil?

  • Patrick

    So if we replace the ‘Spice’ with QE…

    Guild Navigators used the Spice Gas to fold space, and travel without moving.

    BOE Regulators use QE to print money, and manufacture growth without anything growing.

    The Spice is addictive.
    The Spice can drive a user insane
    Manufacture of the Spice leads to turmoil, war etc.

    So who’s Muad’Dib?

  • Anonymous

    We’re entering an era where time is more important than money. Consumers place a higher value on a positive experience than they do on anything else. As humans, they simply want to avoid pain or enjoy pleasure.

    As money is increasingly devalued through Quantitative Easing, resource backed currencies gain in value. Data is an increasingly valuable resource that will replace oil as the #1 resource of choice. Bits of our information are increasingly needed to oil the wheels of Big Business and Big Government.

    Oh dear, can you see how vulnerable they’re becoming?

    The time it takes to keep one’s information fresh and up to date, and therefore valuable, will be worth them paying for. Preventing Big Business and Big Government from exploiting it without our consent is giving rise to a new business model that will protect the interests of the 99% from the interests of the 1%.

    Conventional money is very inefficient in the way it allocates resources. Just look at how much waste is produced by mindless consumers bombarded by ads.

    “Unconventional” money will reward those who make more informed choices, because it will be in everyone’s interests for them to do so.

    In other words a currency that is underpinned by the resource of time and volunteered personal information is likely to produce ultra-efficient outcomes for businesses and economies that can lay their hands on it.

    The opportunity to get back at the system and burn the banksters is likely to generate a feelgood effect and lots of word of mouse. The more members than join the network the more efficient it becomes, and the more savings are produced. The more savings that are produced the more attractive the network becomes.

    Against the value of bonds, property and the equity markets, all of which have their roots in the industrial age, social investment models that motivate positive behaviour change are likely to attract significant amounts of capital as they become safe havens for investors with money. One just has to look at the bloated value of commodities, equities and government debt to understand that the entire financial system is no more than a huge big bubble waiting to explode.

    Yes, it’s all about currency. Community currency that is backed by your time and the trouble you take to maintain your own database.

    Data is the new oil and the time spent maintaining it the new currency by which it is valued, accounted for and traded.

    Will this productive work solve our unemployment problem? Who knows.

    As Edmond Dantes the self-styled Count of Monte Cristo reminds us, we should “Wait and hope”.

  • JW

    ”WiganPlus is a cooperative so it is all of it’s members interests to
    collaborate and share. We incentivise members to volunteer personal
    information which we as guardians with an exclusive license analyse and
    leverage for the good of the community.”
    No thanks, would rather be the ‘guardian’ of my own information.

  • JW

    Someone Iranian? ( to continue the Dune analogy)