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October 30, 2013 5:54 pm
Few things are as alluring as optimism and Mark Carney sees the banking glass as half-full. The Bank of England governor has arrived from Canada with a dose of can-do spirit, casting off the pessimism of Mervyn King, his predecessor.
Where Lord King saw banks of questionable value that have grown too big for society’s good, Mr Carney sees a knowledge industry that has been vital to growth and trade since the 19th century. If bankers behave better and the too-big-to-fail problem is solved – two big “ifs” – the City of London will be an asset, not a liability.
In his speech for the FT’s 125th anniversary, Mr Carney did not exactly dismiss the views of Lord King and Andy Haldane, the Bank’s executive director of financial stability, but he confined them to a footnote. “It was an amazing speech, a radical rupture with the message of the bank since the crisis,” says Ewald Engelen, professor of financial geography at the University of Amsterdam.
Prof Engelen says the about-turn embodies Mr Carney’s “willingness to pursue a debt-driven model that got Britain into its mess in the first place”. Martin Wolf expresses similar doubts, citing a research finding that oversized finance can crowd out other forms of enterprise. As Mr Haldane put it in one speech: “The recent history of banking appears as much mirage as miracle.”
It strikes me, however, that Mr Carney is essentially right about the importance of the City. It does bring “substantial benefits” to the UK economy that extend far beyond well-paid jobs for bankers, traders and hedge fund managers. The question is not whether it is worth having, but whether his optimism about the BoE’s new plans for supervising it are justified.
He is right because you must start from where you are – the UK authorities cannot wave a wand and choose between a leading role in finance and Germany’s strength in manufacturing. The City has been a cornerstone of the British economy since the late 19th century (although it took an enforced break between 1914 and 1963, when the first Eurodollar bond was issued). Britain is not Iceland. Its role in global finance is deeply rooted.
“I’m sure he’s correct that we live in an era of the knowledge economy and it would be foolish for the UK to throw away its leadership position in one of the few sectors where we have not only a foothold, but a lead,” says Philip Augar, who has written several books about the City. “The danger is an industry that is unconstrained.”
Being a financial centre is not risk-free, as New York and London experienced in 2007-08, but it has great benefits. London is much more than a moneymaking hub. Activity related to finance has turned it into a nexus of professional services companies – many of them foreign-owned – that rivals such as Frankfurt and Shanghai would like to lure away. One of the BoE’s responsibilities is to make that as hard as possible.
The City’s global nature brings another advantage. The size and scope of high street banks is vital to UK taxpayers who rescued Royal Bank of Scotland and Lloyds Banking Group, and to small businesses wanting loans, but the big City banks (with the exception of Barclays) are foreign-owned institutions such as Deutsche Bank and Goldman Sachs.
The UK economy thus gains from the Wimbledon effect – that the City is an event hosted in Britain, mostly played by foreigners (Barclays is the City’s Andy Murray). The fear after the wave of 1990s takeovers was that foreign banks would be footloose; in practice, London’s role has expanded without the taxpayer’s burden growing in tandem.
My doubt is not about Mr Carney’s strategic direction, but whether he is over-optimistic about his real task – as he put it: “It is not for the Bank of England to decide how big the financial sector should be. Our job is to make it safe.”
For one thing, it is going to take more than the five-year term as governor that he plans to serve to find out whether he has done so. That introduces an element of moral hazard about Mr Carney. Banks tend to make profits in the short term and losses in the long term; BoE governors face similar incentives when it comes to regulation.
The BoE’s Prudential Regulation Authority has pushed UK banks – Barclays, in particular – to reinforce themselves with more capital but it has not gone as far or fast as the Swiss National Bank in topping up global rules. Mr Carney is noticeably more sanguine about the stringency of the Basel III capital framework than Lord King was.
There is also a crowd-pleasing quality to the liquidity rules unveiled by Mr Carney in his speech. Bank governors used to cultivate ambiguity about whether they would help lenders under stress but he was crystal clear. The BoE will offer liquidity support to banks not only routinely but more cheaply than it did before.
The quid pro quo is that Mr Carney wants to ensure that no bank is too big to fail – those that get into serious trouble will have to be bailed-in by investors, rather than bailed out by taxpayers. The problem is that this policy amounts to jam today with payment tomorrow. He can offer liquidity immediately but it will take a lot of international negotiations to agree on any new bank resolution regime.
That, rather than nice words about an industry that exists and he could not shrink much even if he wished to, is the difficulty. His ambition of encouraging the City while imposing tighter discipline is sound and plays to Britain’s strengths. But the Bank of England has yet to deliver.
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