The collapse of Northern Rock and RBS, and the rapid sale of Alliance and Leicester and Bradford and Bingley were worrying and unusual events. Pictures of people in queues trying to withdraw their money from Northern Rock have become the iconic pictures of the most severe financial crisis to hit the UK since the 1930s or even longer.
           The typical explanation is that these banks went down thanks to the greed of their senior executives and the “City”. The Regulators had only a bit part, it is argued,  as they had been rendered ineffective by “light touch” regulation. Testosterone fuelled lending was reacklessly pursued in the interests of earning more bonus, paid on profits taken long before the full outturn of the lending was known. It was a rotten City model. The answer is ban or tax bonuses, put in much stronger regulation, and buttress banks with large increases in capital in case they do it all over again.
              Recalcitrant facts get in the way of this comfortable explanation for the politicians and regulators who presided over this mess. Surely the main aim of all the regulation in place should be to stop just such a crisis happening? If the regulators thought they lacked the powers they should have asked the government to do something. If the government thought the regulations were too light they should have taken action. In the UK, after all, the whole system of banking regulation was revised and new under the incoming Labour government.
                  The truth is the regulators had the powers to demand more cash and capital under the law as it stood. It was their call. They decided that they could allow the ballooning of balance sheets. They resisted anyone who argued for less debt in the economy, buying into the thesis that banks could now manage risk much better.
                It is also true that in the UK the Labour government was keen for understandable reasons to promote large banks from parts of the country that had not traditionally flourished in the financial service area. The two largest ones that got into difficulties were from the North and from Scotland. Their rapid growth had full government support. The Bank of England allowed it to happen,no doubt understanding the political pressure for it to happen.
             The FSA has apologised for its part in all this. It had the prime responsibility for individual banks. The Bank of England, however, should not excape all blame. It was a central part of the tripartite arrangements for regulation. It had a duty to keep the system safe. The problems at troubled banks soon upset the system in a major way. It had the ability to monitor and the duty to understand the consequences of expanding bank balance sheets on money and inflation. It is difficult to say it did well in these areas. When RBS got into trouble, its balance sheet was larger than the entire annual GDP of the UK. Surely the Bank had to take an intelligent interest in its solvency and liquidity, as it was so crucial to the whole system.
May 30, 2012
Blimey – the FSA has apologised? That makes it all right then, doesn’t it … I think this observation is far mor important:
“The truth is the regulators had the powers to demand more cash and capital under the law as it stood. It was their call. They decided that they could allow the ballooning of balance sheets. They resisted anyone who argued for less debt in the economy, buying into the thesis that banks could now manage risk much better.”
Following your earlier posts, John, may one ask why the government, in the form of Gordon Brown, did nothing?
I do recall that before the crash there were quite a few articles in the dead tree press about how deeply private consumers had got into debts, and I do recall a number close to a trillion. Nothing happened except the usual admonitions about paying back debts.
No – if we do need to have a person or persons to fix the guilt on, then I would lay the blame at the feet of those who choose the people at the top of both the FSA and BoE. After all, the Nineties and Naughties were a time where everybody was into getting as much as they could, where being in debt was seen as normal, where being conservative, especially with money, was soo ‘last century’.
Mind – this wasn’t only happening here in the Uk. It was happenning world wide. I found this book – recommended recently – very instructive:
“Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe – By: Gillian Tett”
May 30, 2012
How about some facts then instead of political mud slinging?
I’d like to know exactly what, other than rebranding the regulator the FSA instead of the Bank, Labour did that contributed so directly to the observed problems.
For example, why are bankers so foolish that they need someone in govt to tell them how much capital to hold? Why is that the govt’s role, and why as a conservative do you not hold to that?
Moreover, what was it that meant that the foolishness of one bank was expected to have such dramatic spillover effects onto the system at large? Can we really pin blame on govt for the extent of over exuberance by bankers in leveraging themselves and trading at high frequencies? How much overseeing does this all-wise, informatipn-rich govt have to do?
Reply. Labour completely changed the regulatory system and put it under the direct control of the Chancellor. They then relaxed the controls on how much capital a bank needed to hold, ignoring the warnings of overheating. They also introduced volumes of complex regulation which banks had to follow which did nothing to prevent the crisis. All this induced the attitude by some banks hat we are meeting the new tougher and more detailed rules so it must be fine.
May 30, 2012
You ask:- Why are bankers so foolish that they need someone in govt to tell them how much capital to hold? Why is that the govtâs role?
Government are taking much of the risk by giving depositors guarantees on their deposits. The senior staff & directors (of the banks) interests do not align with those of the shareholders or other providers of bank capital. Given the opportunity to gamble, using the banks capital, on a heads the directors win a big bonus tails the shareholder/government takes the losses they can clearly be rather tempted and were.
Regulation is clearly needed unless you get rid of the deposit protection scheme. Even then you need to have proper honest accounting rules and audits so depositors can see the real risks they are taking.
May 30, 2012
We’re back on the subject of shareholders and their lack of power to restrain greedy fat cat executives.
This lack of power is directly due to legislation which forces Joe Public to hold his shares in managed funds for pensions and ISAs, which means he cannot exercise any voting rights, but must delegate them to the aforementioned greedy fat cat executives thereby enabling them to vote on each other’s remuneration packages, hence the telephone number figures that they pay themselves, leaving nothing but a few crumbs for the shareholders.
Mr. Redwood, would it be so difficult to change the system so that Joe Public can own and vote his own shares?
The only problem I can think of is that said fat cats would lose the ability to pick our pockets, and would therefore strenuously lobby the government to maintain the status quo under threat of cancelling donations to party funds.
May 30, 2012
Indeed the isa’s, pension funds, unit trusts and the like are largely just an expensive inconvenience for most. Created by silly government tax reliefs (and promoted by a largely parasitic finance industry) which distorts the market and distances people from their investments with negative consequences.
May 31, 2012
Bob I think you’re on exactly the right lines – if minority shareholdings can be ignored, and if they are essentially subsumed into other entities which can collude with executives on boards, we have the kinds of serious problems we’ve observed.
Having a lender of last resort, or at least guaranteeing deposits (up to some number), need not be any worse or any better than leaving that to the free market (it’s likely it would be underprovided in the free market) – it’s the mechanisms in place that provided incentives for banks to behave in this kind of irresponsible way – no shareholders to keep them in check being a (I would argue) large factor in that – that led to the problems.
And I don’t know for sure on this but I suspect that this is not something that one can simply blame Labour for – unless they put in place particular changes that reduced the rights of minority shareholders?
May 30, 2012
As long as the Govt (ie the taxpayer), via the BoE, acts as lender of last resort, & still more as long as the Govt offers explicit and implicit guarantees to certain bank creditors, the Govt must also regulate the capital adequecy and solvency of banks on behalf of taxpayers. Any bank would do the same if it offered such borrowing and guarantee facilities to one of its own customers. The Labour Govt’s regulation of the banks was incompetent – lots of box ticking but no seeing the wood for the trees.
May 30, 2012
Exactly box ticking and trivia while ignoring the substance as is usual with governments.
May 31, 2012
That all looks like assertion to me John – I was looking for some actual facts, details. It’s easy to spin things to make them look particularly incriminating, and politicians are very adept indeed at spinning.
You also don’t even begin to address my question – why is all of that a government’s duty? Why aren’t banks taking these decisions themselves?
I don’t think you’re asking the right questions here, and I think those that commented on my post would agree with that assertion.
May 30, 2012
John, I far prefer this article to the previous – but I still feel as Goebbels said – ‘if you repeat anything, even an outrageous lie, often enough, people will believe it as the truth’
That is why Labour politicians still refer to our home-grown, Northern crisis as an ‘international credit crunch’ and they repeat again and again that ‘every country was affected’.
To be fair to the BOE, G. Brown dismantled the tried and tested regulatory system, splitting the burden of responsibility and among three (competing) regulators, instructed them all to leave it to the banks, and calling multiple times for ‘light regulation’.
So you can trace the entire collapse of the British financial sector down to just one person responsible for the dire financial situation we find ourselves in, and it is only Goebbels mantra and our supine media that leaves him with any position in society.
May 30, 2012
Dont forget Mr Balls who prior to being an MP wrote some sort of thesis for Gordon to follow.
The BoE should have raised flags and it is right to question the bankers themselves but ultimately I am afraid this sits with those that designed and implemented these regulations – the govt of the day.
Their response that this happened elsewhere – nothing to do with Gordon going around the world lecturing other finance ministers on how to raise capitial?
May 30, 2012
lojolondon wrote: Brown dismantled the tried and tested regulatory system […]
Perhaps BCCI (1991) and Barings (1995) slipped your mind.
June 8, 2012
You mean, the BCCI incorporated in Luxembourg and the Barings Bank which collapsed due to trading problems in Singapore? You’re complaining about the regulatory system which barred BCCI from expanding in the UK, and was investigating it months before the Luxembourg courts ordered it terminated? Compare and contrast the fiascos of Northern Rock, RBoS, Halifax-Bank of Scotland: UK banks with UK problems which went unnoticed until it cost us orders of magnitude more than BCCI or Barings!
May 30, 2012
There is a simple solution to all this: stop the charade under which depositors are guaranteed 100% safety (thanks to the taxpayer) while enjoying the benefits of having their money invested in COMMERCIAL manner (i.e. having their money loaned on to businesses, mortgagors, etc. Itâs not the taxpayerâs job to subsidise commerce.
Thus depositors should be forced to make a choice between two types of account: first, 100% safe taxpayer guaranteed accounts, where their money is NOT loaned on. The money could just be deposited at the BoE, where it would earn little or no interest. Second, depositors could go for âinvestmentâ or âcommercialâ accounts. Those should be treated in the same way as investing in the stock exchange: you might win, or you might lose your money.
And if the relevant institution or part of the bank offering investment accounts went bust, that would not be catastrophic, any more than a sharp decline in the FTSE index is catastrophic, or the demise of British Leyland was catastrophic.
May 30, 2012
Ralph Musgrave ,
Do you think our banks are capable of performing commercial lending anymore ?
They have disposed of or side-tracked all the staff who knew about responsible commercial lending . That culture which served the country pretty well took decades to create and a couple of years to dismantle .
There was an incentive for people to keep their nose clean so they might get a mortgage and notion of borrowing to support a lifestyle was alien to most people .
My late father was a bank manager who died in harness 20 years ago when the changes were just starting could see the writing on the wall .
In the lending game , a couple of kids in their twenties or early thirties is no substitute for a branch bank manager in their forties or fifties .
May 30, 2012
That is an interesting point about your dad and the change in bank culture. Do you know of any evidence or studies to back that up?
I am not sure if you were suggesting that that change in culture has any bearing on my basic point above, but if you were, then I donât agree. My basic point was that if depositors want to act in a commercial manner, that is laudable, but they are on their own. If banks are, as you suggest, not as competent at commercial lending as they were, thatâs just tough on those who go for investment accounts at banks. Likewise there are incompetently run corporations, unit trusts, etc. Itâs fair enough for government to enforce the rule of law: e.g. clamp down on blatant fraud. But itâs not the taxpayerâs job to protect investors from investing in incompetently run organisations.
May 30, 2012
Well, if I had been Mr Brown and I saw a long line of angry voters outside Northern rock, I should be reaching for my tax funded cheque book on the spot. Wouldn’t you?
May 30, 2012
The best way of finding out how the culture pervading banks has changed is to talk with those long-term employees and long-term customers of banks who are still alive .
Perhaps someone should make a study of the evolution of the culture within banks and document it for the benefit of future generations before it is too late .
My Father was empowered to make unsecured loans to businesses on their own merit . The idea of dishing out non self-liquidating loans to all and sundry so long as they had a mortgage would have been alien to him .
Cultural changes are difficult if not impossible to reverse . Perhaps banks forgot that they were dealing with customers money and started to view it all as their own .
Perhaps you are right . Perhaps savings account holders and even current account holders need to consider themselves investors in a bank .
Should they be treated equivalently to bond holders or should they be considered equivalent to shareholders and have voting rights ?
May 31, 2012
I’d suggest bond holders. That is what a depositor is nearest to. I.e. depositors and bond holders aim to get ÂŁX back for every ÂŁX they put into a bank. In contrast, shareholders are people who very specifically want to take a risk: double their money or lose a big chunck of it.
May 30, 2012
Ralph, if depositors get little or no interest, what are the banks allowed to do with the deposits, other than hold them?
If all the banks are allowed to do is provide secure storage would they not want to charge for that service?
If there is little or no interest to be had, what is the point in giving your cash to the bank compared with, say, putting it in a home safe?
May 30, 2012
Or just buying an asset, likely to increase in value, such as fuel oil, silver, copper, wine, land or the like.
May 31, 2012
“likely to increase in value” – ah, there’s the rub!
To have actually increased in value at the time you need to realise the asset – oh why is life so difficult?
May 30, 2012
@Ralph Musgrave
Why not return to the old mutual concept, to allow people to borrow money secured on land and buildings, and at the same time allow savers to receive a reasonable rate of interest.
Oh, and reform the Brownian “cliff edge” stamp duty system.
June 1, 2012
Indeed turnover taxes should be very low below 1/2% or preferably not at all.
7% now introduced is totally absurd.
May 30, 2012
Indeed the Bank should clearly have been making dire warning to the government and explaining the huge risks of this massive over gearing of banks. The accounting rules and auditing systems for the banks (and some insurance companies) also clearly fail to reflect the true risks or present a true picture of the real financial position. Just look at ABNAmro before (its purchase by RBS) and the RBS accounts at the time of the rights issue. Were these a fair picture given the events just a few month later?
May 30, 2012
I see the auditor of RBS during their problem period has been promoted to chairman. Can shareholders trust anything one wonders? Well I suppose he has, at least, had good first hand knowledge of the huge problems.
“Deloitte-attacked-for-appointing-former-RBS-auditor-as-chairman”
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8553496/Deloitte-attacked-for-appointing-former-RBS-auditor-as-chairman.html
May 30, 2012
That is far from the only example of incompetence apparently being a qualification for a highly paid job. The head of risk management at Lehmans has been appointed to manage risk at another bank. And thereâs another example of this sort of nonsense â I forget the details â but the details are on a recent post on Mike Normanâs blog.
You want a highly paid job? Just (rely on – ed) taxpayerâs money wear a smart suit, attend the right cocktail parties, and make sure you have an I.Q. well below average.
May 30, 2012
You forgot one thing; hiding your ignorance with buzzwords and jargon. It’s what separates some business leaders from simpletons.
May 30, 2012
I see that the taxpayers alliance put government expenditure at 49% and 57% when you include over regulation. What change has industry got against countries with just a just 20%-30% burden to carry. Why invest in the UK at all and at what point is it just called slavery 50%, 75% or 99%?
David Cameron and Nick Clegg recently unveiled their plans to make Britain âone of the most business-friendly countries in the worldâ.
When are they actually going to start?
http://www.taxpayersalliance.com/costofgovernmentday2012.pdf
May 30, 2012
@lifelogic
I think they had their crossed fingers hidden behind their backs when they made that empty promise.
May 30, 2012
I wonder if we’ll see a series of posts in four years time analysing whether or not it was wise to print such massive sums of money, the main justification for which seems to be no one has any idea of what else to try but feel they need to do something, despite all the evidence that it wasn’t helping but was making things worse and delaying any recovery?
Who will get the blame for this policy debacle?
May 30, 2012
I watched a house price bubble grow and grow from 2001 to 2008. It was not a secret. There were endless property programmes on TV and buying and flipping became a national obsession. Where was the Bank of England. Where were the warning calls about debt ? Why did interest rates not respond and go up to calm down this frothiness ? How did Northern Rock manage to be allowed to issue 100%+ mortgages. Who was looking at loan affordability ?
Even if the BoE was not responsible, they should have been ringing the warning bell loud and clear.
Many people in the UK fail to realise that the banks which caused the problems in the UK were not the investment banks which are the high bonus banks but the boring and not so boring (in the case of NR) retail mortgage banks.
May 30, 2012
“Where was the Bank of England?”
It was attempting to perform its statutory duty of setting interest rates to meet an inflation target defined by the Chancellor, a target for retail price inflation not house or other asset price inflation; firstly expressed in terms of our own RPI-X and then from the end of 2003 expressed in terms of the EU’s CPI.
Mervyn King did (quietly) warn that this change might create problems; from January 2004:
http://www.bankofengland.co.uk/publications/Documents/speeches/2004/speech211.pdf
“Unfortunately, there is an additional complication. Unlike the translation between Fahrenheit and Centigrade, the difference between RPIX and CPI inflation does vary with the economic temperature. That is because the “formula” effect is not the only difference between the two measures. RPIX includes both house prices and Council Tax. Those items are omitted from the basket of goods and services used to construct the CPI.”
“Of greater significance than the average difference between the two measures in the long run is the observation that the gap between them varies over time, often quite widely, in line with changes in the temperature of the economy in general and house prices in particular.”
May 30, 2012
The ‘Hole in the Wall’ didn’t help and made slipping into overdraft all too easy.
The falling standard of living was disguised by credit – not all of the spending was ‘keeping up with the Jones’s.’ The steep trajectory of house prices wasn’t a measure of people getting richer but of people getting poorer. Labour sold it as an ‘end to boom and bust’ success story and the people bought it for three terms of office as they happily tapped into their equity.
Without credit cards, overdrafts and interest only mortgages people would have felt a lot poorer under Blair/Brown.
We did have choices and personal responsibility. The people are to blame for private debt.
May 30, 2012
Perhaps Cameron is hoping to better understand these and other questions by his regular conversations with Tony Blair. I bet you haven’t been invited to Chequers by Cameron. How many Labour ex-ministers are advising Cameron? Do you still wonder that so many of us don’t think that Cameron is a Conservative?
May 30, 2012
Cameron is clearly even less “a Conservative” than Heath or Major. He does not even have the excuse that he is rather dim.
He is however a very good presenter and often says the right things – but he never actually does any of them. His credibility has gone. Surely he is now as much use to the party as an non-creditworthy bank or a chocolate teapot.
May 30, 2012
“It must never happen again.”
Maybe the present system is different? You see, we out here to the North of Watford do not know the precise relationship between the Treasury, the Bank of England and the FSA.
With the Scottish Genius in total control of everything, things went haywire. We would expect that. He was, we are told, not a man to get wrong with.
My point is this: how has it changed (if at all)?
May 30, 2012
I believe that the whole crisis was, and still is, symptomatic of the current moral attitude in this country. Essentially, if something is not “banned”, everyone feels free to do it should they wish. No longer does anyone ask, or think, “should we be doing this?”.
This applies not only to the banks, but to most businesses and life in general and is part of what I believe to be the declining moral standards of this country.
May 30, 2012
The issue that your essay highlights for me is that a heavily regulated banking system is a highly risky system. It allows bankers and their customers to offload responsibility for a bank’s financial stability to the regulator. The banker says: “If the BoE reckons my business model is okay, then that’s good enough for me” and the customer says “the BoE would never allow a dodgy bank to take my deposits, so my money must be safe”.
The argument for lighter regulation of the banks is not, as the lefties would have it, because it creates space for higher bonuses and fat-cat capitalism. Instead, a lighter system with no bailouts or state-sponsored depositor protection would inject a great deal of much-needed caution into the system.
However, the state is too wedded to its ability to print money, and for this process to work it needs the cooperation of a pliant banking sector. So I’m not holding my breath in anticipation of radical change in the relationship between the state and the banks.
May 30, 2012
The other piece of the puzzle which it would be most interesting to read a blog by you on, would be the connection between excessive, debt-financed govt expenditure, loose monetary policy, ballooning bank balance sheets and asset price bubbles. I think people don’t see the connection – Labour speakers often retort that the crisis ‘wasn’t caused because Labour built so many schools and hospitals’. People need to understand how these interconnections created the disaster we had. It was Labour wot did it.
May 30, 2012
I well remember pulling in to a viewing point on the Blue Ridge parkway Virginia .
Another car pulled in and the Scots occupants on hearing us chatting and, making out our non-US accents ,said ‘Have you heard the news ?RBS is bust’
We had a quick chat about the situation and concluded that GB+AD would never let the Scottish banks go under.
They were too much of a Labour success story and contributed much to jobs and house prices in Edinburgh.
Haven’t changed my mind since.
May 30, 2012
A question: Which came first, the Global recession or the bad financial management in countries like the US and UK?
If it was the Global recession, then Labour are correct and the financial problems left at the 2010 election were not their fault. In which case, what did cause the Global recession?
If it was bad financial management in the US and UK, then the Labour government was at least partly to blame for initiating and causing the Global recession.
Last question: Why do the media, TV and Press allow the Global recession caused the problems line during their government from Labour spokespersons to go unchallenged?
Reply. The lurch by the leading western central banks to higher rates and little liquidity caused the recession
May 30, 2012
John re your question ‘Why do the media, TV and Press allow the Global recession caused the problems line during their government from Labour spokespersons to go unchallenged?’
None of these people understands what happened. They more than likely have no education in Economics. Presenters on TV are mostly wanna -be actors who never made it. Even people like Dimbleby are just clowns playing to an audience.
I don’t agree with JR’s analysis that higher interest rates led to our recession or the Global recession.
The tripartite regulatory system set up by Gordon Brown, failed us all spectacularly. Under the unseeing eyes of the FSA, the Bank of England and the Treasury, banks like Northern Rock, HBOS, Bradford and Bingley, Alliance and Leicester ( (remember them?) and Abbey National were allowed to leverage up their balance sheets to a ridiculous degree. As JR says in this article, ‘When RBS got into trouble, its balance sheet was larger than the entire annual GDP of the UK.’
The expansion of these balance sheets was so enormous that it could not possibly be funded purely by deposits, from the likes of you and me. Some of these banks issued bonds to fund themselves but they were also forced to borrow extensively from the wholesale money markets. ( I only know this stuff because I used to work for an investment bank in the City.)
Northern Rock was always one of the weaker credits in the market but they were borrowing more and more from the wholesale markets. Basically, they were lending recklessly (you know 125% mortgages just like HBOS) and they were also funding themselves recklessly.
Not one of our supposed regulators raised the alarm, but the Street (=wholesale money markets) talks. There was growing concern among banks lending to Northern Rock that they were out of control and quite quickly credit lines to Northern Rock were pulled in, meaning that they were no longer able to obtain all the funding they needed from the Street. They were effectively insolvent within a matter of days and were forced to approach the Bank of England for funding. (Imagine Munch’s scream going on at Northern Rock when this happened).
Immediately, the Street were reassessing their credit lines to every major UK bank and they all started falling like dominoes. Nothing had happened to interest rates at this point.
What we, the, UK public, didn’t realise was that we would be called upon to bail out these reckless banks. They never were the private institutions that we thought they were. Their debt became our National Debt.
May 31, 2012
JR – I was just checking the B of E’s website for a history of its Base Rate decisions.
You were right about a movement towards higher interest rates which no doubt did concentrate minds in the City with regard to weaker credits like Northern Rock.
Base Rate got down to a record low of 3.5% in July 2003, the Bank then gradually raised it to 4.75% in August 2004. It was still at 4.75% in August 2006 but then they raised it to 5% in November 2006 when CPI was running a bit hot at 2.7%. They then raised it again in January 2007 to 5.25% and again in May 2007 to 5.5% and again in July – this was clearly the final straw for Northern Rock – to 5.75% .
The one tool at their disposal that they never used was Reserve Requirements.
You can’t help feeling that there was nowhere near enough critical discussion with the banks to let them know what the B of E was thinking and how it would affect them.
May 30, 2012
Still no member of the political class â supported, as it is, by the banking sector â is prepared to acknowledge the rĂŽle of variable interest rates in the generation of the collapse of the financial institutions.
There is no other contract in the world of retail (sc. where the common man deals with businesses) in which years later the vendor can vary the price of something bought to-day: only the usurers can do this. What this means is that, even when, eventually*, the Worldâs economy struggles out of the depression, everything is in place â especially having regard to the fact that governments have proven (what ever their brave words) they will not allow usurers to go under â for a repetition.
Î Î
* Did you hear the cogent Paul Krugman on the B.B.C.âs âTodayâ this morning?
Reply: lots of other contracts have variable and rising prices, e.g. Rental agreements, and inflation clauses
May 30, 2012
The inflation proofing of rental agreements in that way means merely that the rent will be more or less constant in real terms; variable interest rates offer no such promise.
What variable usury means is that the cost of a loan is effectively indeterminate; therein lay the problem. The common man could make the simple calculation that told him he could âpay the mortgageâ; he was not, however, equipped by his small knowledge of matters financial and economic to factor in the variability; as the âfixed rateâ period of his agreement came to an end, he found himself unable to sustain the existing mortgage or to refinance it. That this will happen again can hardly be questioned, can it?
It is within the powers of governments â either extant or that might be taken â to restore the status quo, mortgages as a half-century ago, when the mortgagor knew exactly what heâd have to pay and exactly how long.
Î Î
May 30, 2012
Yes but a lot of mortgages just say it will revert to “our variable rate” – so they can pick any rate they like to suit them. Often, at a time when the borrower is perhaps unable to re-mortgage for some reason or other high LTV or perhaps just the current lack of any real banking, they can thus charge whatever they like to the borrower and simply rob him. As many are doing.
May 30, 2012
Precisely, lifelogic. Thatâs precisely what happened: the so called sub-prime borrowers found, when they came to refinance their loans, that no-one was lending. So many, right across America (less so here in U.K.), just walked away from their homes, mortgages and â the greatest tragedy of all â families because of the inability to deal with or to see a way out of the disaster that had befallen them.
If a patrician view had prevailed â and unfortunately nouveau conservatism (really Whigism) admits of no such thing â instead of the mortgageesâ being baled out with tax-payersâ money the mortgagors would have received assistance in retaining their homes … and the usurers would have been forced to accept the rates â the original, fixed ones â they had effectively led their economically illiterate borrowers to believe would be available for the duration.
Î Î
May 30, 2012
JR: you refer to “the regulators”, plural, but as I understand under the tripartite arrangement Brown had put into law only one regulator, the FSA under Sir Callum McCarthy, actually had any legal power to give instructions to commercial banks with respect to their business models.
The Tory criticism of the tripartite arrangement centred on the divided and potentially confused responsibilities it created, and that argument has some merit, but in practice the main problem seems to have been the separation of legal power from experience and competence.
One established body, the Bank, had long experience and had built up competence, but the legal power it had possessed had been removed to a new body, the FSA under Sir Callum McCarthy, and the Bank was reduced to voicing concerns from the sidelines.
Maybe my description of the FSA under Sir Callum McCarthy as “a bunch of novices and incompetents” is a bit harsh, but the point remains and is reinforced by what happened in Ireland.
OK, so this is only a wikipedia account and therefore not 100% reliable:
http://en.wikipedia.org/wiki/Financial_Regulator
but there are some striking parallels between the sheer incompetence of the new regulator of commercial banks in Ireland and the incompetence of the FSA here.
If Gordon Brown was a honest man, he might even echo Bertie Ahern’s admission that the decision to create a new financial regulator was one of the main reasons for the collapse of the banking sector, and âif I had a chance again I wouldnât do itâ.
I think there must be some concern now that this episode has done irreparable damage, and that putting responsibility for the regulation of commercial banks back under the umbrella of the central bank won’t restore lost experience and competence, or indeed reputation, either here or in Ireland.
There were three regulators. The FSA did detailed banking supervision for each bank. The BOE regulated systemic risk. The Treausry had overall oversight and was meant to convene tripartite meetings to ensure systemic and individual monitoring and enforcement worked.
May 30, 2012
My recollection of this period is of banks and building societies embarking on an unprecidented campaign of aglomeration and expansion on the premise that simply by expanding their loan books and their areas of activity faster than their competitors would enable them to become more profitable and successful. Why did that not work and why is there so little choice in the marketplace for borrowers, particularly businesses?
May 30, 2012
One little point one never reads about is that a good loan, or borrover, today can become bad tomorrow solely by incorrect action on the part of Government. Look at the Spanish banks. Heroes to Zeroes: one minute lovely well secured property loans, the next they are underwater through no fault of their own though you would never guess it.
May 30, 2012
Is the sub text of your posts on this subject that a faulty analysis or explanation now makes it quite possible that the mistake will be repeated?
May 30, 2012
It is all very interesting reviewing the activities of the BoE and the FSA, but at the heart of our problems lie politicians. For ten years Gordon Brown directed the economic and financial affairs of this country to aid him in his war to oust Tony Blair from office because he believed that Blair had cheated him out of his chance to Prime Minister. When, in 2007, he managed to defeat Blair he had to face the shambles he had created. And failed.
May 30, 2012
At least we don’t have the ECB – shackling every Government and bank to the mast of a sinking ship.
Things in Europe have gone from bad to worse. Yesterday and today looked terrible. I can see the entire EZ banking sector is now past the tipping point without German help, which wo’nt come. It’s very close to say whether Germany can help either.
We hear from JPM’s David Mackie that “If a Spanish EU/IMF bailout package covered the governmentâs gross funding needs through the end of 2014, and included âŹ75bn for bank recapitalisation, then it would amount to around âŹ350bn.”
That’s 350 billion from a country that is involvent, whose banks are involvent, whose house prices are collapsing and unemployment soaring. Retail sales down every month for the last 22 months.
Europe is looking absolutely dreadful.
There no options left which on balance makes things better.
May 30, 2012
If we are going to really learn from the crisis it important you understand what happened not the simple story line.
So some facts:
None of the banks you mention vastly expanded their balance sheets.
The balance sheets did grow as profits where earned but the growth was not as significant as you suggest.
None of the banks had particularly low capital ratios.
While both NR and RBS where headquartered in the north there is no evidence there exposures where similar. Remember RBS was built out of Nat West.
So why did they fail. The answer is in the business model. This is most noticeable for NR.
NR largest market was lending UK residential mortgages. NR wrote the mortgages and then securitied them and sold the securities to investors. The mortgages where no longer on the balance sheet of NR and NR had no risk on any default. NR only involvement was then as a processing agent for which they earned a fee.
These securities called “asset backed” or “mortgage backed” where held by many investors.
When commodity prices rose in 2007 and it seemed likely mortgage rates might rise sharply leading to significant losses to mortgage lenders, the ability to sell abs/mbs disappeared over night.
NR could no longer support the level of lending is had in the past as it did not have the balance sheet. its business model had disappeared over night.
If you look at the balance sheet of RBS a year before the crash 1/3 of its assets where designated as assets awaiting securitisation.
RBS was also effected by the purchase of ABN at far to higher prices but just like NR it funding source was not to borrow money but to move assets off the balance sheet.
You suggest the FSA/BOE could have required the banks hold higher capital levels. This was really not practical, can you imagine the response of GB if regulatory authorises threatened his ever lasting boom, also such ratios are set by international standards so its really impractical for one country to move on its own. Finally, I wonder if even if it was possible whether it would work since there balance sheets where built on selling assets not growing assets.
If any one has access to Bloomberg, the information on the web appears limited, and wants to know more about NR business model look up granite bonds.
The question is should the FSA anticipated the change in the abs/mbs market?
May 30, 2012
The question of economic competence will be the main deciding factor at the next General Election. Ed Balls was Gordon Brown’s economic sidekick throughout this period. It is absolutely essential repeatedly to explain to the world how what happened was the direct consequence of their actions because Balls is being allowed to get away with creating an alternative history where none of his fingerprints were on the corpse. This blog is one of the few economically-literate corners of the blogosphere where an accurate analysis of this sorry tale may be teased out. I am very glad that you are taking the trouble to do this.
May 30, 2012
Matt, I agree with every word you say. To hear Balls and Milliband talking as if the current debt/deficit was nothing to do with them is astonishing in its bare faced cheek.
Someone I know in the banking world was predicting Northern Rocks demise well over a year before it happened, not that anyone was listening.
May 30, 2012
Yes “glad” indeed, Matt.
After a long hard day at the office why waste time with Newsnight when you have Redwood (and support crew)!
May 30, 2012
This crisis was 30 years in the making & began with the deregulation revolution of the Square Mile & Street in the 1980s/90s brought in by the Thatcher/Reagan administrations, Gordon Brown was a bit part out of his depth player faced by a Square Mile that was already out of control & heaping up unsecured debt globally before he was in government
Watching a Tory M.P. trying to protect the abusive rich (there’s a surprise!) by deflecting responsibility from where it truly lies by carefully putting together mildly patronising platitude pieces such as this with its ‘recalcitrant facts get in the way of comfortable explanations’ is depressing
#1 The Square Mile & Street went nuts on sheer unadulterated greed having thrown off limitations – or at least thay got the political class on watch at that time to do it for them – that inhibited this inate tendency in the 80s/90s, & they then hot-wired the system & began gambling on an ever-increasing scale with money they did not have using Byzantine financial models & vehicles to conceal & facilitate it
#2 A generation of bankers came on watch at the same time whom, realizing what was underway, abandoned their offices’ duties for the orderly management of the financial system for the benefit of their societies & joined in with it because it created idiotically huge pay awards for themselves
#3 The weakened regulatory system that was left after the deregulation revolution of Thatcherism & Reaganomics was inhabited by placemen & stooges & was less than useless, a cynically ugly state of affairs which everyone on the inside knew about & laughed at quietly
#4 The political class on watch was – by & large – too out of its depth to understand what was underway in the Square Mile other than to look upon it money rush with envy, & pathetically ape it with the abuses that came to light in the Rotten Parliament, i.e. fiddling their expenses – at least those that hadn’t been ministers & couldn’t secure a pay-off on the basis of providing “advice” (read a pay-off) to the corporate sector, post- office; & the short term tax revenue for the Treasury seemed good at the time … “let’s enjoy the sun why it’s shining!” was the attitude, not realising where it was inevitably leading
In the USA there was the complicating factor of Wall Street practically owning Capitol Hill via campaign funding also, so there was going to be very few voices raised from that quarter for this reason alone.
That’s the uncomfortable ugly heart of it Mr. Redwood, not your soft-soap of it “all being a bit of a muddle, musn’t blame the City”, & trying to kill the issue with discussion of micro-details & side-issues & making cheap party political points at the wreck of New Labour
You really must think we’re dumb out here!
Reply :So how come the weakest banks and biggest banking problems are now in the Eurozone?
May 31, 2012
@AJAX
This is not true. Are you a member of the reality based community ?
May 30, 2012
Given that most political parties were congratulating the banks for making so much money are certain political parties were calling for less regulation had the regulators done anything that would impact on the bank’s profitability they would have had incurred the wrath of Parliament. It’s unfair to blame the regulators for not doing something that Parliament would have greatly objected to and would have tried to stop.
May 30, 2012
Uanime5,
You are quite right, Labour was in thrall to the seductive levels of tax revenues flowing in from the over active banks heading for the cliff.
They needed the money to spend recklessly on their pet projects, just a shame its all largely been wasted.
May 31, 2012
Don’t forget about the Conservatives who were calling for less regulation in order to produce even greater tax revenues, which could be spent on their pet projects; tax cuts for the wealthy.
May 30, 2012
Quite a revelation that the FSA apologised . Any organisation is only as good as its leaders and the quality/consistency of the leadership ; question – are the same leaders still in charge ?
May 31, 2012
Not at the top; the first FSA chairman was SIR CALLUM MCCARTHY, and he was allowed to quietly slip away from the scene of devastation in late 2008.
May 31, 2012
Yes, they were. The Bank targetted the wrong inflation index for 6 years when it mattered, 2001 – 2007. The country was awash with money and it had to go somewhere; it went into property prices and into crazy gambling on rising house prices. And behind the Bank’s error was Gordon Brown.
May 31, 2012
“Surely the main aim of all the regulation in place should be to stop just such a crisis happening? ”
No, I don’t think that is possible. A state where the law forbids people acting irrationally is essentially a communist state (and there is no evidence it even worked in practice in Soviet Russia). Any system where people are free to act on their own welfare has to accept that panics WILL happen, that banking crises are inevitable, and instead of attempting to regulate them out of existence they should instead plan for them and work out ways to reduce the impact.
There is no doubt in my mind that aspects of British government policy failed under labour, but the entire statement of “No more booms and busts” is a lie. Under a capitalist system booms and busts are inevitable.
The realisation of that came after many hard lessons. After the great depressions of 1870, 1930, and the banking crises that plagued the world prior to Baghout. Banking Crises are inevitable. So we have measures to prevent them being worse than they need to be (central banks that offer deposit guarantees and liquidity during bank runs), and state measures to prevent them becoming a deflationary spiral (the welfare state, employment benefits, and fiscal stimulus) .
But banks are responsible for remaining solvent, for making good investment decisions, and for making sure that their risks are appropriate to the economic climate. I’m sorry. No regulator knows the extent of a banks risk and liability as well as the bank itself. It only stands to reason that if the government could run the banks and eliminate risk from them the bank employees should be paid a fraction of the amount they are.
The government has never offered a guarantee that any particular bank will survive or thrive, it only guarantees deposits and sets regulations that minimise the likely loss of any bank failure under that scheme.