Bash the banks and praise the Regulators?

On both sides of the Atlantic politicians are out preaching their favourite syllogism. Regulation stops crises. Existing regulation did not stop the crisis. Therefore we must have more regulation. All round the world they are also looking for politically easy ways of getting their hands on even more cash to spend, and to fill some of the holes in their budgets. The banks are an easy target for both these impulses.

The banks are very unpopular. The retail side of them can give a poor service as customers see it or thwarts the legitimate aims of their customers. The banks do not seem to be shy when it comes to charging. The investment wings of the banks pay large salaries and mega bonuses which makes many people jealous. When the banks through their own poor management or through the clumsy interventions of the regulators need to come to the taxpayer for loans or even subsidy the public blood can understandably boil over.

We should also ask how well based all this belief in certain types of regulation is? There was no shortage of rules and laws when the US and UK banks got into difficulties in 2008. The problem as we have often discussed was the regulatory judgement – the leading regulators of the US, UK and some other leading countries saw nothing wrong with the low levels of cash and capital banks had relative to their huge loan and derivative books. It turned out both the regulators and the bankers were wrong.

The same issues arise over the regulation of European airspace. Why was it unsafe to fly last week and perfectly safe to fly this week? What changed? The wind direction did not change, and the volcano is still smoking. Was the regulatory response proportionate last week, and is it safe enough this week? Why was there such a sharp downward revision in safety margin?

The consequences of regulatory mistakes can be huge. The aviation industry suffered huge losses and their passengers were put through great inconvenience and misery. The gross failure of the monetary and banking authorities in the period 2005-10 has caused large job losses and loss of income throughout the western world. Of course it took two to tango – some bank directors and senior managers made big errors within the regulatory framework and rules set for them.

The question to ask now should be what tax and regulatory regime will help the recovery. Tempting though many may find it to seek revenge on the bankers, we should instead have two preoccupations – a strong economic recovery and getting the taxpayers money back form the banks that did take subsidy or where the taxpayer owns shares. These two aims require the same response.

Any tax increase on banks reduces the amount of cash and capital they have, and therefore cuts the amount of lending they can do to fuel the recovery. Higher taxes may also lead to higher fees and charges as banks seek to rebuild their profit and cashflow against the fiscal headwinds. In the end it is we the public that pay these taxes.

Regulation and monetary policy today is contradictory. The banks are told they must lend more, and the monetary authorities keep their indicative interest rates very low. Meanwhile the Regulator demands too much extra cash and capital for this stage of the cycle, preventing the banks using the access to cheap money to lend on to the private sector to speed the recovery.

Policies made out of popular anger against a given group are often not wise. The current vogue for more tax and regulation of banks panders to the popular mood but delays the recovery.

Promoted by Christine Hill on behalf of John Redwood, both of 30 Rose Street Wokingham RG40 1XU

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34 Comments

  1. Stuart Fairney
    Posted April 22, 2010 at 9:48 am | Permalink

    "The question to ask now should be what tax and regulatory regime will help the recovery"

    With respect, the question is "will a tax and regulatory regime help recovery or should we stay the hell away"

    The question answers itself.

    • Y Rhyfelwr Dewr
      Posted April 23, 2010 at 7:40 am | Permalink

      There will be a tax and regulatory regime. That's what governments do — regulate, and tax to fund the nation. A government that didn't regulate would be a pretty feckless one.

      The question is what sort of tax and regulations do we need? Should the tax rise or fall? Should we introduce new regulations or alter the existing ones? Should there be heavy or light regulation?

      • Stuart Fairney
        Posted April 23, 2010 at 9:30 am | Permalink

        Well indeed, you are quite right, that is what governments do. Statist tendencies creep in to all parties. I simply question the need for statism by questioning one of its manifestations.

        But I have to disagree, not regulating makes you feckless? Capitlism will survive heartily without the state on its back. Indeed many regulations are pointless or even damaging.

        Name three regulations that make the world better that relate to private sector provision of goods or services?

  2. lola
    Posted April 22, 2010 at 9:48 am | Permalink

    "..regulatory judgement…" What! That's an oxymoron.

  3. alan jutson
    Posted April 22, 2010 at 10:08 am | Permalink

    Will be interesting to see who is going to pay all of these extra taxes.

    I will take one guess, THE CUSTOMERS.

    Yes Regulation was poor after Gordon changed the set up in 1997.

    Yes the FSA who Gordon appointed, had record of failure, failed again.

    The Banks (only some who have been given a bailout) are now working on margins many, many times greater than pre financial crisis, and so balance sheets have swollen.

    The balance sheets have also been swollen by an increase due to Stock Market Valuations in general (because the Banks were bailed out).

    All this and lending to the Private sector is down, with tighter rules, why, because the strengthening balance sheets are really just an illusion based on confidence in the markets caused by Government intervention underwriting failed regulation.

    The rather anoying factor is that bonuses are being paid, not because the Banks are trading well, but because of pure circumstance of the moment.

    The bigger question is, what margins are the Banks going to trade at in the future, and what is it going to cost us all in increased charges, which when added to any Government tax on Banks will make doing business even more expensive.

  4. no one
    Posted April 22, 2010 at 10:39 am | Permalink

    areas that do need more regulation and policing:

    the psuedo lawyers who have set up to fight employment tribunal cases, do divorces, conveyancing etc without being regulated by the legal profession

    the companies registered in mauritius and other places operating in the uk for tax reasons

    the indian outsourcers who bring their own practises to the uk much of which is illegal under uk law, we cannot expect their staff to use employment tribunals to solve this, uk companies and people need to be able to compete fairly

    so i wouldnt say we are always over regulated

  5. Acorn
    Posted April 22, 2010 at 11:14 am | Permalink

    If the last week has proved anything, it is that you can regulate yourself to a standstill. The volcano was a very visible example that had a tangible effect on thousands of individuals.

    But what about all the other thousands of regulations that businesses have to contend with every day. The ones that are not visible to the end user; the ones they end up paying for and never know it.

    It is not just Banks that are short of cash and capital, the last week has shown up a similar problem with some individuals. If you are stranded in a foreign airport with a maxed out credit card and no standby cash; you quickly get to understand what operating at very high leverage, actually means in the real world; just like a Bank. Particularly if your HDS – holiday default swap (insurance)- does not pay out.

    Naturally, this is all somebody else's fault. It must be the holiday company that miss-sold me the holiday. The airline that did not have a standby hotel room booked for me, should the plane not fly. The insurance company that did not cover the total shutdown of air space by a regulator. The regulator who failed to regulate a volcano's emissions. The weather man who knew the volcano was erupting; and the wind was blowing it my way, before I left home.

    I demand compensation from err. That would be me then.

  6. Posted April 22, 2010 at 11:18 am | Permalink

    It is obvious why government wants more regulation of banks. It gives an excuse for yet more growth in the size of government & it unfairly but handily deflects criticism for our economic collapse from government to bankers.

    Whether there is a genuine public desire for more regulation is a different question to which I se no answer. Political "debate" in this country is something allowed between carefully selected politicians with the BBC acting as gatekeeper & from which the public is excluded except as audience. The resentment that has caused is being made apparent now.

  7. Posted April 22, 2010 at 11:38 am | Permalink

    Each bank in the country is examined at least every 12 to 18 months.

  8. Max Van Horn
    Posted April 22, 2010 at 11:45 am | Permalink

    There is no situation that government intervention cannot make worse.

  9. Colin Hart
    Posted April 22, 2010 at 12:06 pm | Permalink

    We need to start distinguishing between regulation and supervision. The latter is what the Bank of England used to do. The banks would be called in by the Governor and told they were either lending too much or too little. The understanding was that if they didn't heed the 'suasion' they would have to bear the consequences. By and large it worked unless there was policial interference (the Heath/Barber money supply boom).

    Apply the same principle to air travel. Call in the airlines and tell them (and the public) there is a high/medium/low risk conditions are such their planes may not make it through the volcanic ash. It is up to them and the travelling public to decide what they do. It's called taking responsibility for your own actions.

    Continue as we are and we will become increasingly infantilised.

  10. Posted April 22, 2010 at 12:29 pm | Permalink

    Regulations and indeed all laws are as only as good as their draughtsmanship and enforcement. The problem is that too many are introduced in a hurry, and the enforcement is frequently incompetent. This, of course, is good for lawyers who spend their time looking for (and usually finding) loopholes. Enforcement frequently consists of rigid rules which are enforced regardless of their relevance in a particular situation.
    This doesn't only apply to financial matters, but to a wide range of subjects from the Human Rights legislation, where it how seems that we cannot deport foreign criminals illegally in this country because of their human rights, (which I'm sure was never intended) right through to the Dangerous Dogs Act which is being avoided by breeding dogs of a different types.
    All legislation in a hurry, without proper discussion, is dangerous. Laws on financial matters, especially involving overseas activities requires even more care, particularly as their are relatively few people who are fully capable of understanding the various activities.

    • no one
      Posted April 22, 2010 at 5:32 pm | Permalink

      yea and work visa rules which are so infrequently policed or enforced that they may as well not exist, so many multinationals just take the mikey

      compare and contrast with what happens to ordinary folk if they do 35 in a 30 past a speed camera

      • Y Rhyfelwr Dewr
        Posted April 23, 2010 at 7:49 am | Permalink

        I think it was Croydon council that was caught out encouraging police and PCSO's to concentrate on enforcing laws which would result in fines payable to the council — revenue, in other words.

        While I'm not opposed to speed cameras (except the average-speed cameras, which are genuinely oppressive), I do wonder to what extent government has come to regard the law as a revenue stream.

  11. Ian Jones
    Posted April 22, 2010 at 12:30 pm | Permalink

    I'm as free market as they come but I would like to see the banks broken up. What we saw was the banks trading on their own behalf, getting into difficulties and then getting hundreds of billions in bail outs. This would not be too bad if they didnt then go and pay themselves billions in bonuses whilst the economy crashed all around them.

    As far as I am concerned, banks should take deposits and lend out money. They should not be able to trade and gamble on their own behalf and any organisation that does gamble on behalf of others must have massive capital to cover the losses.

    Never again must the masses be raped by the few.

    • Y Rhyfelwr Dewr
      Posted April 23, 2010 at 8:18 am | Permalink

      I don't have a problem with the way the banks operate — they couldn't afford to pay the rates of interest that they do otherwise. And while the bonusses are annoying, I would never, ever dream of trying to dictate how a company remunerates its staff. Permitting government to regulate how much people are paid is a very dangerous road to embark on, for numerous reasons. Anybody advocating such a policy either hasn't thought it through, or is a charlatan trying pull the wool over the public's eyes for a massive governmental power grab that would take civil liberties back to the Dark Ages (Gordon Clown fits the second category)

      I do agree with you, however, that the banks are too big. The big ones have the market sewn up between them, and it's almost impossible for new entrants to compete equally. They really provide a dreadful service, aware that for every customer they lose, they'll gain one who is disatisfied with one of the other banks. They know they can get away with treating the public appallingly badly while playing "Pass the customer" with each other.

      I think savage action to break the banks into smaller units and increase competition — perhaps by forcing the big banks to sell a substantial proportion of their high-street operations to smaller banks — would provide a more genuinely competitive environment, and act as a warning to banking executives in the future.

      Then, I think, we'd see fairer charging, better customer concern and real competition between the banks. Every bank would be at pains to demonstrate to the public how carefully it looked after its customers' money while providing substantial returns on their customers' investments. The situation that exists at present is not far off an oligopoly — a monopoly shared between a number of sellers. and monopolies are never in the public's interest.

  12. Lindsay McDougall
    Posted April 22, 2010 at 12:30 pm | Permalink

    Go even further back in the chain. Blame the government and the Bank of England for setting and applying an inflation target that did not take house prices and other asset prices into account. This is a monetary matter – just about anything whose price can be driven up by excessive money supply should be included in the inflation measure used for setting monetary policy. You can also retain measure(s) like CPI for the benefit of Joe Public.

    Once we have broken up the big nationalised banks and sold them off, there is no need for regulation. If a bank messes up, let it crash and apply for bankruptcy like any other business. I want to hear no special pleading for depositors. If you put cash under the mattress and a burglar steals it, that is a matter for you or your insurers, not the state. It should not be beyond the wit of the insurance industry to insure depositors against bank failure without involving the state; the premiums would be low.

    If banks want to submit voluntarily to a system of regulation, that's fine.

  13. APL
    Posted April 22, 2010 at 1:04 pm | Permalink

    JR: "Existing regulation did not stop the crisis."

    And if you want to know why, watch Bill Black testify before the U.S. House financial services committee.
    http://www.youtube.com/watch?v=3-HTylLzXu8&fe

    BB: "ALL of the major regulatory agencies were complicit …"

  14. Pauper
    Posted April 22, 2010 at 3:04 pm | Permalink

    Being a bit slow-witted, I have two questions about banks and government lumbering about in my head to which I should be glad to have answers from those wiser than I:

    1. Why does government give a free guarantee to bank depositors? Why does it not charge a premium for such a guarantee on a straightforward commercial insurance basis?

    2. Would banks behave in a more prudent fashion if they were run as Hoare's Bank is, as a non-limited liability company in which the directors are personally responsible down to their last cufflink? If the answer's Yes, is this not a simple and elegant way forward?

    Er, that's three questions. Sorry.

    • Y Rhyfelwr Dewr
      Posted April 23, 2010 at 8:28 am | Permalink

      I can give a partial answer to 2: I don't know anything about Hoare's Bank, but the idea behind personal liability is that the directors act as guarantors. If I run a small business which unlimited, and it's liabilities are £100,000, its creditors can get their money back by insisting I pay them £100,000 — I might have to sell my house to do it, but it would be possible.

      If you imagine what the liabilities of an immense company such as Barclays must be — it would be pointless for the directors to maintain any sort of personal liability, because they don't assets that would even begin to cover it. Bankrupting them all and throwing their kids onto the street might be a satisfying vengeance for some, but it wouldn't get anybody's money back.

      • Pauper
        Posted April 23, 2010 at 9:25 am | Permalink

        Thank you, sir. You are certainly right that no board of directors' private assets would begin to cover a major bank's liabilities; but my point was that, to the directors themselves, bankruptcy would act as a formidable disincentive to immoderate risk-taking. No fancy credit default swaps when your home's on the line!

        As I said in my post, this is how Hoare's Bank on Fleet Street has been run since it was founded in the 17th century. It's still family, still independent, still going strong and, so far as I know, was entirely untouched by the banking crisis. Until recently a director slept on the premises every night in case a customer needed a spot of banking in a hurry. There's service.

        I know from comments such as yours, sir, that Mr Redwood's blog is read by seriously knowledgeable coves. I would really love an answer to my first question: Why must the taxpayer GIVE what he could easily, prudently and properly SELL?

  15. Stephen Shorland
    Posted April 22, 2010 at 3:10 pm | Permalink

    John,

    Why the Hell don't we confess that Keynesianism is bunk and the only reason Labour is spending such huge printed sums is to keep things together until after the Election? Ron Paul is gaining ground in America with just that message.(See the recent Rasmussen poll, Obama 42%,Paul 41%). 'You can't borrow your way out of debt'. Please somebody read 'Economics In One Lesson' by Henry Hazlitt.Let's get Austrian Economics talked about in THIS country for a change.We're going to go down the rubbish chute with 5 more years of Keynesianism.Grow up and be a proper Political Party with the balls to tell the truth!!

    • Posted April 22, 2010 at 8:07 pm | Permalink

      The Keynesianism of which you speak is the illegitamte variety. Keynes’s General Theory was written in the belief that capitalist economies get themselves stuck in a depressions. Governments should step in with fiscal stimulus (public works programmes) to get the economy moving in such situations. In the Keynesianism of the 1950s and 1960s, it was believed that government’s could totally smooth the fluctuations by fiscal stimuluii in the downturn and reigning in the economy in the booms. Such control lead to political business cycles (a stimulus leading to an election and a reigning in after) along with every increasing unemployment and inflation.
      Whatever version of Keynesianism you follow, it would be a perverse sort that says that you should undergo a massive fiscal stimulus in the good times, increasing the National Debt. They would have also need to reign in the bubbles in the housing market and in consumer credit. Neither would any traditional Keynesian be so extreme to suggest that efficiency savings of 0.6% of GDP would tip a growing economy into recession, as they would recognise the more serious issue of controlling the ballooning deficit.
      However, you have a point that the Austrians have better a explanation on the crisis. They explain downturns in terms of monetary imbalances emerging in the economy. For instance the long-period of low interest rates, along with the consumer credit and housing bubbles fit in well with Austrian theory. But the Austrian imbalances occur as a result of the spontaneous order. This crisis was very much of people have a pretence of control (sometimes boasting about it), when in fact they were just delaying and exacerbating the eventual downturn.

  16. BillyB
    Posted April 22, 2010 at 5:09 pm | Permalink

    It is not clear to me why you keep blaming Brown's socialist agenda for failing to regulate the banks adequately, when the Government of George W Bush was doing exactly the same, together with the rest of Europe. I don't think you'd accuse Bush of being a socialist.

    I don't think socialism has much to do with it. Bankers are just smarter and greedier than politicians and regulators in all countries and have us all by the short and curlies. That is the real issue. Stop making apologies for them and come up with a credible plan to deal with them.

    • Y Rhyfelwr Dewr
      Posted April 23, 2010 at 8:30 am | Permalink

      Brown's socialist agenda made the whole thing much, much worse, as demonstrated by the fact that we were the first country into recession, and the last out.

  17. Posted April 22, 2010 at 5:12 pm | Permalink

    I'v updated my website today….

    Blood Sweet and Tears Options
    We shell go on to the end we shell fight with growing confidence and growing strength in the air we will carry on the struggle until in god’s good time he allows the tax payer to vote in a conservative government .

    I’m not impressed easy WOW! a blue car.

    You’ll have to speak up I’m wearing a towel

    Beautiful flowers and almighty trees enchanted gardens and majestic forests from a 45 as we kick labour gov/party out out out sow say the knights templar let us celebrate this agreement with the add of chocolate to milk now what is a wedding ? it's a process of removing the weeds from the garden.
    I hope I didn’t brain my damage
    Nuts and gum together at last

    http://www.mark.onlyhere.net

  18. gac
    Posted April 22, 2010 at 8:25 pm | Permalink

    This may not be on topic but with another 'leaders' debate tonight it may be apt.

    For those who do not know why the Conservative vote is in freefall, check out the excellent cartoon by Brookes in today's The Times.

    Says it all really!

    Last minute strategy – either give a retrospective vote on the Lisbon Treaty or…… hire Mandelson to fib for the Tories for a change.

  19. Posted April 22, 2010 at 11:37 pm | Permalink

    Mr Redwood,
    Your comparison with the ash cloud and the banking regulation is very apt. It is not just the cost of inappropriate regulation. The leaders’ debate of tonight showed crystallised the issue for me. How do the authorities deal with an unprecedented situation? The risk-averse say let us do nothing until there is full information. On the financial system, nothing was done to control the excesses. On the ash cloud everything was stopped until the scope of the problem could be assessed by the experts.
    There is a way of going into the unknown without full information. You set general rules and assess the magnitude of any problem.
    – On the ash cloud, you compare the risk with the size of the eruption, the size of the particles and the distance from the volcano. From this, you would have found no evidence of large jet aircraft getting into emergency situations 1,000 miles from an eruption, in an ash cloud that is hardly visible.
    – From the financial system, the situation was evident that house prices and consumer borrowing was going to unsustainable levels on an unprecedented scale from 2003 onwards. The 0% interest credit cards and the large discounts for changing mortgages were evidence of this in the UK. The sub-prime boom, with mortgages deals agreed whereby in 3 years the borrowers could not meet their repayments was evidence of this in the USA. It was the very magnitude of the problem that should have merited special attention. The action should have been to raise interest rates and increase cash requirements for banks.

    On the surface the action was the opposite – One to stop what was already happening, the other that immediately stopped anything from happening. But the cause is the same – by requiring detailed rules and acting on how others will perceive our actions, the authorities took wrong course of action.

    How the leaders debate crystallised the issue is to go off topic. See http://manicbeancounter.wordpress.com/2010/04/22/

  20. Posted April 23, 2010 at 7:17 pm | Permalink

    Banks need to be bashed because of their habit of keeping your money for at least 4 working days while they get the interest before they transfer it. Their excuse for this (when I can trasfer money between various different accounts at the touch of a botton) is that they want to make sure that the money goes through – even when it comes via another reliable bank or financial institution. They know about their own BACS so why don't they use them? Other professionals handling clients' money have to use a client account so why not the banks?

  21. Posted April 25, 2010 at 11:16 am | Permalink

    Regulations and indeed all laws are as only as good as their draughtsmanship and enforcement. The problem is that too many are introduced in a hurry, and the enforcement is frequently incompetent. This, of course, is good for lawyers who spend their time looking for (and usually finding) loopholes. Enforcement frequently consists of rigid rules which are enforced regardless of their relevance in a particular situation.
    This doesn't only apply to financial matters, but to a wide range of subjects from the Human Rights legislation, where it how seems that we cannot deport foreign criminals illegally in this country because of their human rights, (which I'm sure was never intended) right through to the Dangerous Dogs Act which is being avoided by breeding dogs of a different types.
    All legislation in a hurry, without proper discussion, is dangerous. Laws on financial matters, especially involving overseas activities requires even more care, particularly as their are relatively few people who are fully capable of understanding the various activities.

  22. Posted April 26, 2010 at 3:21 am | Permalink

    John,

    Why the Hell don't we confess that Keynesianism is bunk and the only reason Labour is spending such huge printed sums is to keep things together until after the Election? Ron Paul is gaining ground in America with just that message.(See the recent Rasmussen poll, Obama 42%,Paul 41%). 'You can't borrow your way out of debt'. Please somebody read 'Economics In One Lesson' by Henry Hazlitt.Let's get Austrian Economics talked about in THIS country for a change.We're going to go down the rubbish chute with 5 more years of Keynesianism.Grow up and be a proper Political Party with the balls to tell the truth!!

  23. Posted April 27, 2010 at 12:30 pm | Permalink

    Well indeed, you are quite right, that is what governments do. Statist tendencies creep in to all parties. I simply question the need for statism by questioning one of its manifestations.

    But I have to disagree, not regulating makes you feckless? Capitlism will survive heartily without the state on its back. Indeed many regulations are pointless or even damaging.

    Name three regulations that make the world better that relate to private sector provision of goods or services?

  24. Posted April 27, 2010 at 5:10 pm | Permalink

    yea and work visa rules which are so infrequently policed or enforced that they may as well not exist, so many multinationals just take the mikey

    compare and contrast with what happens to ordinary folk if they do 35 in a 30 past a speed camera

  25. Posted April 28, 2010 at 7:43 am | Permalink

    Being a bit slow-witted, I have two questions about banks and government lumbering about in my head to which I should be glad to have answers from those wiser than I:

    1. Why does government give a free guarantee to bank depositors? Why does it not charge a premium for such a guarantee on a straightforward commercial insurance basis?

    2. Would banks behave in a more prudent fashion if they were run as Hoare’s Bank is, as a non-limited liability company in which the directors are personally responsible down to their last cufflink? If the answer’s Yes, is this not a simple and elegant way forward?

    Er, that’s three questions. Sorry.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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