Regulators have always made judgements

The FSA says today it will in future monitor more and make judgements about the safety of various financial products and activities.

The tripartite regulators led by the Chancellor made some very important judgements 2005-8. Between 2005 and 2007 they thought banks had more than enough capital and cash for their huge increases in lending and investment banking. They were wrong. They allowed the banks to bloat their balance sheets in a damagaing way.

Between end 2008 and today they have told the banks they have to raise or hold much more capital and cash relative to their lending. This has unsurprisingly proved very recessionary. Again they have been wrong – they should have asked for a more sensible rate of progress to more prudence, geared to the state of the economic cycle.

If the regulators wish to make more judgements, they should consider the next possible crisis, not the last.

They should ask, for example

Is it right for pension funds to be encouraged or required to keep so much of their asset in Uk government bonds? Markets think at these interest rate levels these are risky instruments. What happens if markets lose confidence in Uk government debt, or if interest rates have to increase substantially to raise all the extra money?

Is it right to encourage or require banks to keep so much of their liquidity in UK government bonds? What happens if they fall in price?

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11 Comments

  1. Lola
    Posted March 12, 2010 at 1:56 pm | Permalink

    Yeah.

    "OOOo look, what we've been doing hasn't worked and lots of banks have failed."

    "What shall we do then?"

    "Let's do more of what we have been doing until it works".

    Tossers.

  2. Grenville
    Posted March 12, 2010 at 1:56 pm | Permalink

    Yes John. I couldn't agree more and this is what I've been saying too on other blog comments re the government financing all its spending: the socialists just don't understand money because they think it just "happens" of its own accord. And all you need to ask them is:

    Do you have a pension? If so, would you like it to be invested in IOU's from the British Government given that it's in such a dire financial state? No? Just who, then, do you expect is going to buy them all? Foreigners? But your just printing pounds through QE like McDonalds Happy Tokens so there not going to like them much. Etc etc.

    They haven't got an answer of course. The banks have bought alot of them but eventually they will have had enough.

    And then the sh*t hits the fan.

  3. Steve Cox
    Posted March 12, 2010 at 2:51 pm | Permalink

    John, as always you're on time and to the point, but why ask IF government bonds will lose value? I have seen numerous reports forecasting that the yield on gilts will have to double over the next decade, i.e. that the value of existing issues will halve. Look at the train crash that is UK Plc, and is it any surprise?

    • michael mcgrath
      Posted March 12, 2010 at 4:14 pm | Permalink

      I suppose that, were the value of gilts to halve, the government could buy back it's debt at half price

      Sounds like Brownonomics to me

  4. Lindsay McDougall
    Posted March 12, 2010 at 3:09 pm | Permalink

    You don't need regulators at all if you are prepared to let financial institutions crash and burn. It we need to break up the banks to get to that point, so be it.

  5. Sally C.
    Posted March 12, 2010 at 3:55 pm | Permalink

    Agree with all the comments above.

    Have any of you looked at the report on the failings at Lehman Brothers prior to its demise. I have copied the link below to FTAlphaville which then gives you the link to the actual report. I have not looked at it in detail yet because it's enormous. but clearly an awful lot of work went into this report and this is the conclusion of the lawyer who put it together:
    ' The Examiner concludes that there is sufficient evidence to support a colorable claim that: (1) certain of Lehman’s officers breached their fiduciary duties by exposing Lehman to potential liability for filing materially misleading periodic reports and (2) Ernst & Young, the firm’s outside auditor, was (questionable-ed) (Named individuals left out-ed)
    The word 'colorable' apparently means that a claim could be backed up with factual evidence.

    This is the link:
    http://ftalphaville.ft.com/blog/2010/03/11/173206

    What I want to know is why have we not had a similar report on the failings of management at Royal Bank of Scotland, Halifax Bank of Scotland, Bradford and Bingley and let's not forget that oldy but goody – the very first UK bank to collapse (well before Lehman Brothers) – Northern Rock.

    I personally feel that it is the least the people of Britain – who have bailed out these institutions – deserve, and if not from this government then the next government.

    Reply: Banks and auditors have a right to put their side of the story. In the case of RBS and LLoyds HBOS it was obvious they were overextended, as some of us argued at the time when we opposed mergers and urged the authorities to control cash and capital better. These things may just have been bad misjudgements shared between Regulators and bank Directors – they are unlikely to be criminal acts. Shareholders should have been able to see from what was published that these banks were vulnerable. Some of us said do not go near bank shares in 2008 before the crash, based on the published information.

  6. Mike Stallard
    Posted March 12, 2010 at 5:59 pm | Permalink

    Out of the kindness of my heart and at a 40% discount, I teach immigrants English at our local church hall. In order to do this I had to spend 4 hours at home doing the paperwork (unpaid). Two other people, one of them the Director, have spent at least 10 hours each on paperwork, which means, of course, that these two people simply cannot do the job which they are paid to do: look after immigrants. And they are being burned away with their keenness sapping by the day.
    Drunken Lithuanians in real trouble come a long way behind immediate attention to unnecessary papers.
    Yesterday I was inspected. At first, Chris was promised then, when he couldn't come, we got Kevin. Kevin, however, proved to be indisposed, so we got the Regional Manager instead. A perfectly charming person who obviously knew all about how to teach, the RM made this comment, "How I wish I could be at the cutting edge teaching again."
    That means three people to supervise me – a part time employee!
    "They are just covering their ass", said Tomasz who was at University, "like all bureaucrats."
    And that goes for the FSA too, I have no doubt.
    Please will the conservatives respect their promise and restore all powers to the B of E?

    • Steve Tierney
      Posted March 13, 2010 at 1:19 am | Permalink

      Paperwork and regulation are indeed the bane of British life. It sucks the energy from entrepreneurs, business and volunteers across the board.

      We could probably burn most of it – if we had the courage to let go of the safety blanket.

  7. Ian Pennell
    Posted March 12, 2010 at 7:11 pm | Permalink

    FROM: Ian Pennell, ALSTON, Cumbria. CA9 3LQ

    12th March 2010

    Dear Sir John Redwood

    On the subject of regulators, and of quangos over £100 billion is spent on them. The Bumper Book Of Government Waste, written by the Taxpayers Alliance shows how the Government wastes this much money every year! The Conservatives seem to have largely ignored this, and the potential to attack the Government with it and to promise to use this money to show the electorate how we would pay down our debt and provide a strong USP to give millions a real reason to vote "Conservatives".

    Sorry to change the conversation a little, but this is important. We do have some good policies and the general thrust of getting Government "living within its means" is sound. We need to shout about our policies that we do have, a bit more often, for starters. But we really need a STRONG Unique Selling Point (the Conservatives dont have one) that appeals to millions of voters- QUICKLY!

    Now, has Sir David Cameron recieved any Bellowings from Conservatives who are getting very worried about our Opinion Poll slide and the fact that (through his trying to be all things to all men)we are not in a position to provide funds to support a strong Conservative USP?! I am talking about tax cuts, which our economy will need to keep growing strong and a willingness to make one million useless quangocrats hate the Conservatives by sacking them (in order to provide tax cuts to please tens of millions more voters).

    Why hasn't the Conservative Leadership not grabbed the work by the Taxpayers Alliance (showing how £100 billion can be cut from public spending without hurting frontline services) to show how the deficit will be cut, how existing policies will be funded and to provide millions with a real incentive to vote for us?

    Are the policy-makers in our Party incompetent? How come we have the worst Labour Government in living memory yet Opinion Polls are starting to indicate that Gordon Brown might just secure Labour a historic 4th term?!! Where is the strong Conservative USP in the Conservative Manifesto.

    Sir, you should go to the Conservative Leadership and tell them to start really jumping about. We even seem to have forgotten to at least give it some welly in attacking Labour! We are sleep-walking towards a disaster here and the Conservative Leadership is in a state of paralysed trance.

    Are we simply just going to let Labour's powerful spin machine and Mandelson-trained spin doctors brainwash the electorate with their lies, to make out that WE are the incompetent lot, when it is Labour that has messed things up? You Sir, should go down to CCHQ and scream at them to get out there, get their act together and put some real effort in! Someone needs to grab Sir David Cameron and Sir William Hague by the lapels and scream "WE ARE GOING TO LOSE THIS ELECTION!" (as someone did to poor Norman Tebbit before the 1987 Election after they saw a poll showing Niel Kinnock's Labour Party just 4% behind the Conservatives!).

    Conservatives should all be writing in local and national newspapers every day with arguments refuting Labour's lies that our policies are not funded properly, and attacking Labour's record on the economy, on schools, the fact that our inner cities are war zones and the fact that the NHS is a disgrace! And we are not, we should be!

    Lets turn this situation round, its not too late! Alas time is running out, there's only eight weeks to the Big Day!

    Regards

    Ian Pennell

  8. ps
    Posted March 12, 2010 at 7:48 pm | Permalink

    The FSA are either (allegations made) or incompetent. Either way they are no good.

    Why not simplify by abolishing them and giving the regulatory function to the B of E who understand the issues? (I.E Reverse another useless Labour initiative).

    • alan jutson
      Posted March 13, 2010 at 9:47 am | Permalink

      ps

      I have to agree, you do wonder what the point of such organisations are if they fail so consistantly.

      Lehman's reported missing $50 billion was clearly not picked up by the FSA or it would seem (press reports) by the Auditors.

      Clearly Gordons threesome (type of Regulation) has failed again.

      I have to say the FSA does seem to have a lousey track record over the last 20 years, what with Insurance miss selling, monitoring of failing Insurance Companies, monitoring of failing Banks.

      They get paid bonuses as well, rather rubs salt into the wounds.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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