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Last updated: January 16, 2013 8:43 pm
If a close confidant had asked Sir Mervyn King, governor of the Bank of England, a year ago which City institutions he would like to take down a peg or two, the answer might well have been: Goldman Sachs and Barclays.
It has happened more by accident and opportunism than by express design, but during the past six months, the governor has duly hit those banks where it hurts.
Now into his last half-year in the job, Sir Mervyn – never one to make a secret of his antipathy towards the kinds of highly paid risk takers that in his view undermine the financial system – appears to be wielding power like never before.
On Tuesday, in testimony to the Commons Treasury committee, Sir Mervyn told MPs that Goldman’s plan to delay the payment of UK bonuses to avoid the 50 pence tax rate was “depressing” and “lacking in care”.
Within two hours of that statement, Goldman’s board in New York had decided to ditch the idea of delaying the bonuses, with bankers attributing the decision, at least in part, to the governor’s views.
The incident echoed a far more scripted example of influence last summer when Sir Mervyn made it clear to Barclays’ then chairman, Marcus Agius, that he should sack Bob Diamond as chief executive, following the bank’s £290m Libor rate-fixing fine.
The governor’s intervention elicited praise, because he had reflected the growing political and popular disdain for Britain’s best-paid bank boss.
But there was criticism, too – Sir Mervyn had overstepped his role, which does not include bank supervision (though that will change in April, when the Bank of England is to absorb the core of the Financial Services Authority).
It is not only in dealings with senior bankers that the governor has exercised power in a personal capacity – and been criticised for it. Last summer, he stitched together the funding for lending scheme with George Osborne in the Treasury without consulting the BoE’s Monetary Policy Committee or its Financial Policy Committee.
The decision prompted a letter of complaint from the four external members of the MPC who thought that the new policy had important monetary policy implications. The letter reflected a long-held suspicion by external MPC members that the governor liked to set policy outside the formal committee structures where he had only one vote and had been pushed into a minority several times.
The irony is that the governor’s show of power, in particular in regard to individual banks, has contrasted with a softening of his stance in his core role as a systemic supervisor.
In two instances during the past couple of months – first as chairman of the FPC, which sets the parameters for the safety and soundness of the banking system, then as chairman of an important panel within the international Basel Committee on Banking Supervision – Sir Mervyn has overseen a retreat from earlier tougher views.
Observers have several theories. Some say Sir Mervyn’s imminent departure from his role has weakened his negotiating power with global peers. “He’s a busted flush,” says one senior banking analyst. Others are convinced that the deteriorating economy has weighed on Sir Mervyn’s outlook.
Mario Draghi, his counterpart at the European Central Bank, has emphasised the seriousness of the eurozone crisis and elusive growth regionwide. To take too hard a line on the banks – as providers of credit to the economy – could make matters far worse.
A third theory has it that Sir Mervyn has simply realised that in his sunset months, he needs to choose pragmatism over puritanism in order to make any headway on important reforms before it is too late.
Either way, Sir Mervyn’s less academic approach of recent months, albeit spiced up with some enthusiastic canings, should ease the way for the handover to his more market-oriented successor, Mark Carney, currently governor of the Bank of Canada.
Meantime, there is still a frustrated excitement among BoE staff that reform ideas – to encourage freethinking and to end a culture of excessive deference – are on hold because of Sir Mervyn’s continuing opposition.
Amid everything, perhaps the biggest surprise is that Sir Mervyn, in his new guise as outspoken pragmatist, has described Mr Carney – a Goldman Sachs banker in a previous life – as an “outstanding choice to succeed me” and that he seems to bear no grudge.
ATTEMPTS TO PULL THE STRINGS
Sir Mervyn’s criticism of Goldman Sachs, over the bank’s plan to game the upcoming cut in the top rate of income tax from 50 to 45 per cent, was a little more than the central banker’s traditional raised eyebrow. “I find it a bit depressing that people who earn so much find it would be even more exciting to adjust their payouts to benefit from the tax rate, knowing that this must have an impact on the rest of society, which is suffering most from the consequences of the financial crisis,” he told MPs on Tuesday. Goldman backed down.
BARCLAYS CHIEF EXECUTIVE
The governor’s intervention last summer to eject Bob Diamond as Barclays’ chief executive was controversial. But Robert Jenkins, a colleague on the Bank’s Financial Policy Committee, says Barclays’ Libor fine was just the final straw. “If a bank is systemically important, has a balance sheet larger than the nation’s GDP, is leveraged 33 times and has a history of aggressive risk-taking, then surely it is his duty to intervene. We should all be grateful that he did.”
UK BANK CAPITAL
In November, Sir Mervyn presented a tough-sounding report in his capacity as chairman of the BoE’s Financial Policy Committee. The report suggested that Britain’s banks might be as much as £50bn short of capital. But the banks and their investors clearly felt they had been let off the hook, largely because Sir Mervyn backed away from an earlier view that equity capital is all-important, advocating newfangled instruments, such as contingent convertibles instead.
GLOBAL LIQUIDITY BUFFERS
Last week, in his capacity as head of a Basel Committee sub-panel, Sir Mervyn presented the latest thinking on global liquidity requirements – the holdings of liquid assets that banks must hold as buffers for times of trouble. Banks will be given longer to come up with smaller, less narrowly defined pools of liquid assets, Sir Mervyn said. He had come under pressure from peers in Europe, but had also come to believe that enforcing excessively strict buffers could hamper an economic recovery. The view is part of a more pragmatic stance towards bank regulation evident over the past six months.
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