The Governor and the banks


                It was strange timing for the Governor to give an interview attacking the attitude and approach of the commercial banks shortly after the government had declared an end to the war on banks. The Merlin deal was meant to mark an end to the era of hostility. It was to usher in an era of co-operation. The banks are now meant to offer good service, help the economy expand and grow, and behave responsibly on bonuses. In return the government would drop the hostile rhetoric, not impose any extra taxes than the ones already imposed, and ensure proportionate and effective regulation.

The Governor maybe wished to show he is no poodle of the government by carrying on his own public verbal war after hostilities have ceased elsewhere in the Establishment. He aligns himself with Labour in Opposition rhetoric on the banks, whilst confirming his support for deficit reduction by the government. That may well be balanced and sensible politics. It does however, have a drawback for one in his important position.

The Governor happens to be the system regulator for the banks already, and is about to become their day to day all powerful regulator under the changes to the system the government has announced. A Regulator needs to be truly independent. It is normal to avoid colourful prose or one sided remarks as a Regulator, to retain confidence in your role.

We need a detailed banking regulator of the large banks who is fearless and  independent. If customers, political parties, Unions and others bring him complaints about banking conduct, he needs to have their respect as a tough impartial investigator. He needs to call for evidence and promise remedies if they make their case.

He also needs, however, to have the confidence of the banks. They must know he is no pushover and will not suffer unreasonable conduct, but they must also know he is not institutionally biased against them. They too must expect a fair hearing, and know that if they prove their complainants wrong or mischievous they will win their case. They should expect tough action against them if the evidence supports the complainants.

Dr Vince Cable and Mr Jeremy Hunt could tell the Governor a thing or two about the need for regulatory independence and the need to be careful about what you say. Dr Cable’s remarks against Mr Murdoch meant all agreed he could no longer act as regulator in the Sky case. Mr Hunt’s  remarks before taking office praising Mr Murdoch’s contribution to the media in the past led Mr Hunt to rely entirely on the judgement and advice of independent regulators, instead of exercising his right to make his own decision on his own assessment of the merits, as a buttress against legal challenge. Mr Hunt first said the original deal should be referred on the advice of the authorities, and subsequently said the revised deal with an independent Sky News did not need to be referred, again on advice.

Any Regulator must be careful in public speech, and genuinely have an open mind. It is not sufficient just to avoid expressing a prejudice. It is important not to have a prejudice.  They need to get at the truth,even if the truth is sometimes unpopular or contrary to common spin. Exciting interviews make this more difficult. At least the Governor lined up on the popular side of the row about the banks, which will limit the criticism of him.

Tomorrow I will discuss the merits of his individual criticisms of modern banks.


  1. norman
    March 7, 2011

    Have I missed the memo where the New Conservatives are now pro-business? For the last two years it’s been all banker bashing and now, like so much else from this government, it’s an about face.

    I thought we’d all be deliriously happy to see all the undeserving fat cats from HSBC et al booking flights to Hong Kong? No?

    Whatever next, the tax that can’t be touched for 5 years, 50%, being reversed?

    I don’t believe even Cameron and Osborne could be so unscrupulous as to do that though. After defending it for the last two years it would surely be a u-turn too far.

    1. lifelogic
      March 8, 2011

      Cameron pro-business (and anti EU nonsense) well in his speeches but never in any of his actual actions.

      Business can only judge and benefit from real actions not hot air.

  2. lifelogic
    March 7, 2011

    Clearly you are right as regulator he need to above the fray.

    The failure of bank regulation, which led to the bank problems and then on to the banks pulling back huge amounts of lending, has been the main cause of the downturn. That and the over large wasteful state sector and massive over regulation and taxation.

    Banks have gone from lending 75% of almost any reasonable property asset to lending 50% if you are lucky and then with hugely higher fees and margins. Without property security lending to smaller businesses is thus almost unobtainable. Many projects that would employ people are thus on hold for lack of funding.

    The consequence of this is the downturn, and unemployment we have seen. In essence poor regulation and poor management of the deposit protection scheme were at the root of the problem.

    Banks have been crippling their good customers, for reasons unrelated to risk, by pulling funds back to make good their blunders elsewhere. The government has done nothing, that has worked, to address this problem. This has been a huge blunder on their part delaying any recovery hugely.

    It is fine for Cameron to make speeches about helping business but his actions on tax, employment and other regulation and banking say the opposite. His actions say – if you have drive or have money to invest the UK is probably not the place to be.

    Particularly as the Tories look likely to be replaced with an even worse government in four years time due to their lack of pro business action. I fail to understand why they are so determined to dig their own grave in this way when they could actually take pro business action rather than just talking about it – while doing the reverse.

    1. Javelin
      March 7, 2011

      The reason high deposits are needed is because it’s reasonable to expect house prices to fall by 30% over the next few years. The UK economy is on a downward trajectory in the long term. This is due to an uncompetitive spirit, a debt driven, unmotivated young work force, globalisation etc, etc. Young people can’t afford current house prices and there is no reason to think they ever will.

      Until house prices drop by 30% we shan’t have a realistic and growing economy.

    2. Simon
      March 7, 2011

      Do you think banks still have the expertise required to lend money to small and medium sized businesses ?

      The Mr Mainwaring type bank manager was ditched 20 years ago when it was deamed quality lending was not lucrative enough .

      The culture which created them was swept away too .

      If the banks are incapable of making unsecured loans then they are not fit for purpose .

      All the financial services industry seems to be good at is stiffing British customers with the huge margins and fees you mention for everything from lending to business , mortgage lending , pensions plans .

      They exact a tribute from everyone in the land and the Govt goes along with it because the banks effectively collect tax for them .

    3. oldtimer
      March 7, 2011

      It is difficult to see, objectively, why a business should risk substantial investment in the UK. Corporation tax and personal taxes are relatively high by international standards (as described by our host a few days ago). Inflation is higher than many competitor economies which, combined with higher corporate taxes, makes the achievement of a return on investment that much more difficult. Looking further ahead the government has yet to table a convincing energy policy that will assure that the lights will stay on when all the wind farms are built at a huge subsidised cost paid for by consumers and businesses alike. The state and the consumer are over borrowed; this severely limits the scope for domestic economic growth. An investor therefore needs to consider the scope of the UK as a base for exports – no doubt taking careful measure of the quality of national educational standards and output not to mention the volatility of the national currency.

      No wonder existing residents, such as HSBC, are thinking out loud why on earth should they stick around and so many other have already decided to relocate their HQs abroad. The Chancellor has an opportunity, in his next budget, to give meaning to the words that Britain is open for business. At the moment it is difficult to see good reasons why anyone should come. Maybe the best he can hope for is to slow down the losses and make inertia the preferred option for resident businesses.

    4. Stuart Fairney
      March 7, 2011

      Simply because their personal interest does not coincide with the national interest; that and a good dose of hubris and a “we know best” statist, managerial culture.

      Mr Cameron knows he can lose in 2015 and have a similar outcome to Tony Blair, really how bad is that for him? QED.

      No real change unless we vote for it

  3. Gary
    March 7, 2011

    we dont need any politburo regulators. we need to abolish the legal tender laws that enable this fractional reserve cartel to exist. this is not a free market, this is a govt enabled monopoly and as such fulfills the definition of (authoritarian corporatism ed). if you believe in free markets you cannot support this cartel.

    1. Gary
      March 7, 2011

      i am referring to the defn of fascism by no less than the archetype fascist Mussolini , who said “ Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power ”

  4. Alte Fritz
    March 7, 2011

    As any reader of ‘Tinker Tailor Soldier Spy’ will recall, Merlin was supposed to be a source of valuable intelligence. Instead, Merlin was a phantom within the KGB feeding worthless intelligence to the British in return for which Merlin gained our crown jewels.

    It will take more than a curiously named agreement between banks and governemnt to persuade the people that it can be anything like business as usual.

    And the B of E is supposed to regulate that bubbling cauldron.

  5. Brian Tomkinson
    March 7, 2011

    Nothing Mervyn King does or says in public explains why the Conservatives wanted to give the BoE more powers whilst he was its Governor. In fact it becomes more, not less, understandable.

    1. Brian Tomkinson
      March 7, 2011

      Sorry, the final sentence should read “In fact, it becomes less understandable.”

  6. Denis Cooper
    March 7, 2011

    I think he was probably right to say what he did, in general terms, but I’ll wait to see what specific criticisms of the content there may be.

  7. alan jutson
    March 7, 2011

    Just sounds like Mr King flexing his soon to be grown muscles, and informing everyone he will perhaps not be a pushover for anyone in the future.

    Perhaps at last he feels able to be free to speak his own mind under this Government, which perhaps was very restricted under the last.

    Clearly if the BoE is going to be in charge of Banks once more, he will need to curb his language and views in public to a degree, but I rather like hearing his thoughts and views on how he would prefer Banks to behave, as long as they are truthful and he is faithful to those views.

  8. English Pensioner
    March 7, 2011

    According to the media, HSBC is “more likely than not” to move its HQ back to its roots in Hong Kong. I wonder how long it will be before Barclays does something similar, they’re no bounden to the government having arranged their own finance during the crisis. Dubai anyone?

  9. StrongholdBarricades
    March 7, 2011

    I had actually taken Mr King’s speech as a signal to the banks for the day when the BoE takes over the work that was failed to be done by the triumverate set up by Balls and Brown

    He does appear to recognise that the banks did get stuff very wrong, but also stating that they are adding insult to injury by raiding their customers to shore up the viability of their own businesses, and effectively reining in GDP by not allowing expansion on meaningful terms

    It is also refreshing to note that Bob Diamond is saying that “Banks should be allowed to fail”. So as a shareholder of RBS, as soon as the share price is at a level to repay the bail out the govt should “dump” the shares and allow RBS to sink or swim without a backward glance.

    As an additional question, if HSBC makes it’s HQ in HK will the LSE force their listing off the FTSE?

  10. Steve Cox
    March 7, 2011

    It’s laughable that Mervyn King is still harping on about the commercial banks when it was his own decisions and his MPC’s back in the middle years of the last decade that created the low interest rate environment which encouraged the banks to lend so recklessly. It’s Mervyn King who should be (criticised-ed), before any high street bankers. Yet what does he do? Tops up (the Bank of England’s pension fund with -ed) inflation-proofed funds. So please don’t anyone expect old Merv to care about high inflation, he looks after number one, (etc). The man is a joke and George Osborne is losing credibility every day by quietly endorsing King’s policies. Then again, I suppose that Mr. Osborne is also rich enough to have his money well protected from inflation? The rest of us can eat cake. (Which actually horse fodder, by the way!)

  11. forthurst
    March 7, 2011

    HSBC complain that for being headquartered in the UK, they pay a 100% of their UK based earnings under Osborne’s levy. HSBC became embroiled in the subprime (problem-ed) when they purchased Household.

    The objective of regulation and taxation in the UK banking industry should be to cherish the good and drive out the bad and in doing so prevent as far as possible (bad practice or bad judgements-ed) even when such activites are condoned and encouraged by the various US Federal Agencies and the Federal Reserve private secret bank. (Fed publishes a lot about itself and is a branch of the US state-ed) (sentence left out)
    Subprime has provided many bankers with obscene levels of wealth whilst impoverishing millions with taxpayers picking up the tabs. Now the bankers are busy gaming the commodities markets with global effect on prices despite there being no legitimate reason for bankers to be involved there at all, and now we read that there are ‘concerns’ about Contingent Convertible bonds – we need to face up the fact that many bankers believe they are entitled to far greater rewards than any measurable added value of social benefit would allow and are quite unscrupulous in bridging the chasm between the two.

  12. sm
    March 7, 2011

    Imbalances are building again i heard somewhere in that speech.
    Perhaps that’s the main point. HMG is pursuing a policy to reflate the banks at the expense of the real economy. We still have ZIRP and QE and the threat of more as and when the banks suddenly incur further losses when rates rise not just in the UK.

    In such uncertain times it may be brave to relocate just for tax reasons assuming your profitable. Moving back could prove expensive , especially if someone else moves into the gap.

  13. stred
    March 7, 2011

    The problem is that banks can move our money almost anywhere in order to avoid tax and maximise bonuses. HSBC was probably the best run bank during the crisis and did not make the mistakes of the cavalier Scottish disasters. It is still playing a clever game, minimising tax to a few per cent by moving capital to the States where it can offset losses.

    The British saver on the other hand is paying the full rate with penalties and extortionate interest on income tax and an effective capital gains rate of 56% on assets kept for 20 years and more for longer. Bank directors have been made to pay increased CG tax on their delayed share bonuses, but if they sell them after a few years when they receive them, the inflation addition will be small and they will pay the real rate of 28%.

    I think I will put my savings under the floorboards.

    1. Stuart Fairney
      March 7, 2011

      Just don’t put them there in fiat paper…

  14. BobE
    March 7, 2011

    In 2015 we will get a labour government. David and George realise that and can only concentrate on protecting their own futures. They will do whatever it takes to obtain a path into a nice little number. MEPs perhaps?

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