New ways of dealing with old banks

 

           I have been asked to comment on the rapprochement across the Atlantic between the US and the Uk authorities over how to handle future bank crises.

           They are proposing a new regime where banks in trouble are put into controlled adminsitration effectively. Shareholders and bondholders would be at risk. Bondholders of various kinds would be converted into shareholders if the bank can no longer meet all its obligations, so the bank automatically has to pay less interest on its capital  and has more equity capital at risk to absorb the lossses. The taxpayer would be less at risk, the capital providers more at risk.

           The new regime would allow orderly disposal of the peripheral activities with value. It would allow continuation of the core functions of money transmission and settlement , and allow deposit protection schemes to support depositors to stave off a run.

             I do think it is a big advance on conduct in 2007-8. I then wanted them to place highly stressed banks into controlled administration, to protect depositors, but to make shareholders and bondholders take the pain, and sell off the assets that had some value to help pay the bills and slim down the mega banks in trouble.  It will still need intelligent bank regulation and Central banking to avoid such accidents in the first place, which is a better answer still than this approach to trouble once trouble has hit.

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82 Comments

  1. Leslie Singleton
    Posted December 14, 2012 at 6:17 am | Permalink

    What please is “controlled administration” exactly? Is it an animal, perhaps a legally defined animal, in its own right? I ask because I had thought that (ordinary) administration involved considerable control as it was.

    • APL
      Posted December 14, 2012 at 9:50 am | Permalink

      JR: “What please is “controlled administration””

      It’s a phrase invented to make people think they are doing something new, when in fact they would be doing what they are legally obliged to do anyway.

      There are laws against trading while insolvent, I think?

      • forthurst
        Posted December 14, 2012 at 2:10 pm | Permalink

        “There are laws against trading while insolvent, I think?”

        They don’t apply, in practice, to banks and banksters; JR will explain why.

        • APL
          Posted December 15, 2012 at 12:13 am | Permalink

          forthurst: “They don’t apply, in practice, to banks and banksters; ”

          Do you mean they do apply, they are just not applied?

          • forthurst
            Posted December 15, 2012 at 12:59 pm | Permalink

            I believe so.

    • Posted December 14, 2012 at 10:05 am | Permalink

      Controlled is mainly a political word it just mean good so you must agree with it. Rather like most political words are meant to, for example sustainable, integrated, efficient, safe, ……………. who want uncontrolled, unsustainable, disintegrating, inefficient or unsafe?

    • Leslie Singleton
      Posted December 14, 2012 at 2:41 pm | Permalink

      Postscript–Allow me to make clear that my question was not in any sense meant to be in the least snide or derogatory but on the other hand you are not doing yourself any favours by not explaining what you mean–over and above (ordinary) administration. A Glass-Steagall lookalike would of course do much to remove the argument for much of this sort of (government) “control”.

  2. Duncan Black
    Posted December 14, 2012 at 6:27 am | Permalink

    Could you comment on the abolition of private central banks – e.g. The Fed and the BoE – and the taking over the control of interest rates and issuance of interest-free debt by a publically controlled body?

    • forthurst
      Posted December 14, 2012 at 2:08 pm | Permalink

      The BoE was nationalised in 1946; that is not secret information. Any money it earns belongs to the Treasury. The FED is a private secret organisation by statute which is therefore not subject to statutary public audit, unlike other trading organisations, and whose shareholders are not publicly declared. The FED has a monopoly on the issuance of the world’s reserve currency.

      The BoE was partly responsible for triggering the American War of Independence by obtaining statutary control over the the issuance of money with adverse consequences for the real economy. The BoE is run by civil servants who do not, as previously, become extremely rich.

      • Duncan Black
        Posted December 14, 2012 at 6:30 pm | Permalink

        Can you explain then, why is the BoE protected by “Royal Commission”. Many people do not seem to know this – I did not when I approached Companies House recently and was told I could not have access to the articles of association for the company (the BoE) because it is “protected by Royal Commission”. If you don’t believe me, try approaching Companies House yourself. For starters, you will see the letters “RC” before the BoE’s company number – this stands for Royal Commission and means that there is sensitive information about the company which is secret – you and I are not allowed to know. What on earth could this be?

        • forthurst
          Posted December 15, 2012 at 1:17 pm | Permalink

          ‘RC’ stands for Royal Charter, consequently the BoE does not have to file its accounts with Companies House. The BoE provides plenty of information on its website, far more than that which it would be required to file by statute as a limited liability company. If you are still uncertain as to the Bank’s ownership, I suggest you follow Dennis Cooper’s advice, but also seek confirmation that the Treasury is still the benefical owner of all the shares so that they are not holding them as nominees for a certain very rich personage (Ahem).

          • Duncan Black
            Posted December 16, 2012 at 6:26 pm | Permalink

            Indeed Forthurst – I have repeatedly heard “suggestions” as to who that / (those 2) personages are – and I believe this explains the unnecessary convolutions I have referred to. The only REASONABLE explanation, I believe, is that the BoE is indeed controlled by “certain – private – personages” in the shadows – how else to explain charging oneself interest on money that one has lent to oneself when in fact, if the BoE was indeed publically owned we would be issuing interest-free debt (to ourselves). The public is so gullible – just get the mainstream medial onside and Bobs-your-uncle!

      • colin
        Posted December 16, 2012 at 6:23 am | Permalink

        At the time that the Bank of England was nationalized I believe another company was formed–Bank of England Nominees-or some such name.I won.der what the purpose of that company is and what annual profits have accrued to the Treasury from the nationalized bank

    • Denis Cooper
      Posted December 14, 2012 at 2:55 pm | Permalink

      In a spirit of helpfulness, here’s a form for making an enquiry to the Office of the Treasury Solicitor:

      http://www.tsol.gov.uk/contact_us/enquiry_form.htm

      You could ask whether the current Treasury Solicitor still holds all the shares in the Bank of England, which were entrusted to one of his predecessors when the Bank was nationalised in 1946.

    • libertarian
      Posted December 14, 2012 at 5:47 pm | Permalink

      The BoE IS a publicly controlled body

      • zorro
        Posted December 14, 2012 at 7:21 pm | Permalink

        The B of E was nationalised in 1946……. though one might wonder why it was considered necessary in 1977 to form the BANK OF ENGLAND NOMINEES LIMITED, (BOEN), a wholly owned subsidiary private limited company, no: 1307478, with 2 of its 100 £1 shares issued and its Memorandum & Articles of Association’s Objectives which are;- “To act as Nominee or agent or attorney either solely or jointly with others, for any person or persons, partnership, company, corporation, government, state, organisation, sovereign, province, authority, or public body, or any group or association of them….”

        The BOEN is a wholly owned subsidiary of BOE, which was granted an exemption by the Minister of State for Trade from the disclosure requirements under Section 27(9) of the Companies Act 1976 , because; “it was considered undesirable that the disclosure requirements should apply to certain categories of shareholders”.

        The BOEN is supposedly a ‘dormant company’ which in 23 years has never traded and only lodges ‘Short Form’ un-audited accounts ?

        An FOI response in 2011 from the Bank’s Deputy Secretary, Ben Norman said the following….. ‘It might be helpful if I were to clarify at the outset the status of BOEN and the Bank of England (the Bank) under the Fol Act, in relation to any information which may be held by BOEN or the Bank concerning the questions you have raised. BOEN is not a ‘public authority’ within the meaning of the Fol Act and accordingly is not subject to the Act….’ and the following…. ‘Subject to this, I can provide the following information in response to your questions. BOEN acts as a nominee company to hold securities on behalf of certain customers. It is a private limited company, incorporated in England and Wales in 1977, and is a wholly-owned subsidiary of the Bank. The shareholders are the Bank and John Footman, who holds his share as nominee on behalf of the Bank. The directors are John Footman and Andrew Bailey. The Secretary of State has
        granted BOEN an exemption under section 796 Companies Act 2006, which means that BOEN is not subject to the notification provisions in section 793 Companies Act 2006. The exemption has been granted to a subsidiary of the Bank because it is intended to apply only to BOEN and persons on whose behalf securities are held by BOEN, rather than the Bank itself.’

        zorro

        • Duncan Black
          Posted December 15, 2012 at 5:26 pm | Permalink

          These convolutions make one suspicious I’m afraid. Also, why charge interest on money lent if that interest is going to oneself (the BoE).

          No, I’m afraid I am not convinced that the BoE is, de facto, a publically held company. Too many inconsistencies.

          reply: this is a silly conspiracy theory. The Bank of England is an arm of the UK state. Parliament can do as it wishes with it.

          • zorro
            Posted December 15, 2012 at 10:52 pm | Permalink

            Reply to reply – OK, if Parliament can do what it wants with it. Why does Parliament not instruct it to create debt free money, instead of adding to the national debt and paying perpetual interest?

            zorro

            Reply Parliament has done just that with the QE programmes

          • zorro
            Posted December 17, 2012 at 12:03 am | Permalink

            Let’s see what happens with QE….If they use it to cancel the debt, I will concur with you.

            zorro

          • sm
            Posted December 17, 2012 at 1:02 am | Permalink

            Where is the money interest free money? and why have we not cut out the middlemen yet? (EU laws aside)

        • Duncan Black
          Posted December 17, 2012 at 8:07 pm | Permalink

          “it was considered undesirable that the disclosure requirements should apply to certain categories of shareholders”

          Publicly owned, eh! Hmmmmm !!!

          I have little doubt that a fast-one is being pulled on the great British public

      • Duncan Black
        Posted December 15, 2012 at 7:54 pm | Permalink

        “The BoE IS a publically owned company”

        Then answer me this: why are the articles of association of the BoE protected by Royal Commission? Why? What are they wanting to hide – what?

        • zorro
          Posted December 15, 2012 at 10:50 pm | Permalink

          It is certainly correct that there should be more transparency around the BoE articles of association and other arrangements…..Again, I do not understand the need to have formed the BOEN in 1977 or its legal protections to avoid certain types of disclosure…….

          zorro

          • Denis Cooper
            Posted December 16, 2012 at 11:50 am | Permalink

            It could well be that BOEN was intended to act of behalf of important people who wanted their financial affairs kept very private and so wished to have their transactions carried out through a nominee, maybe members of our Royal Family or foreign royalty or friendly heads of state etc etc.

            BOEN is not the only nominee company in the world:

            http://www.encyclo.co.uk/define/Nominee%20company

            However the key point with regard to the ownership of the Bank of England is that BOEN is a wholly owned subsidiary of the Bank, NOT THE OTHER WAY ROUND, and does anything more need to be said about it in that regard?

            Reply: The Bank publishes very full accounts which consolidate its subsidiaries.

  3. Posted December 14, 2012 at 6:28 am | Permalink

    Indeed that is the way to go but Shareholders need some proper control of the Directors. Directors have been able to get away with murdering companies while helping themselves to vast sums of shareholders funds without any controls.

    At the moment shareholder control is rather like the level of control voters have over MPs and the government virtually none.

    • Posted December 14, 2012 at 6:29 am | Permalink

      With similar disastrous results in both cases.

    • Posted December 14, 2012 at 6:35 am | Permalink

      A good blog this morning from Delingpole – man made global warming even the ipcc admits the jig is up.

      http://blogs.telegraph.co.uk/news/jamesdelingpole/100194166/man-made-global-warming-even-the-ipcc-admits-the-jig-is-up/

      • A Different Simon
        Posted December 14, 2012 at 2:35 pm | Permalink

        Remember the grammatically challenged headlines when Tony Blair won his first General Election ?

        “It’s the Sun what won it” .

        Now it looks like the establishment is having to admit :-

        “It’s the Sun what done it”

      • uanime5
        Posted December 14, 2012 at 8:05 pm | Permalink

        An article that cherry picks quotes without providing any context isn’t proof of anything. Here are some quotes from the leaked IPCC report that Delingpole decided to ignore because they don’t fit with his delusions.

        Cosmic rays enhance aerosol nucleation and cloud condensation nuclei production in the free troposphere, but the effect is too weak to have any climatic influence during a solar cycle or over the last century (medium evidence , high agreement).

        ….”no robust association between changes in cosmic rays and cloudiness have been identified. In the event that such an association exists, it is very unlikely to be due to cosmic ray induced nucleation of new aerosol particles”.

        So the evidence is clear; the sun is not responsible for the recent increase in global warming.

    • Mungojerry
      Posted December 14, 2012 at 1:18 pm | Permalink

      Directors shareholdings and pensions should be be after normal shareholdings and bondholders for priority on repayment.

    • uanime5
      Posted December 14, 2012 at 8:07 pm | Permalink

      While giving shareholders more power can help them hold directors to account it will also make it easier for hedge funds to exert more control over businesses. This may result in more companies being bought, partially dismantled for short term gain, then sold off for a profit.

  4. Single Acts
    Posted December 14, 2012 at 6:35 am | Permalink

    Given that the entire regulatory framework failed utterly in 2008, I am unclear why ‘better’ regulation will work this time?

    Why not simply say ‘caveat emptor’ to people who would buy bank services and encourage individuals and firms to actually assess risk and diversify assets accordingly. It seems to me that the credit rating agencies could assess banks and publish the results. With respect, they may do a better job than government bureaucrats and it wouldn’t cost the tax payer anything.

    • Lord Blagger
      Posted December 14, 2012 at 9:08 am | Permalink

      Quite. More and more regulation. Look too at state control. The best example recently is Northern Rock.

      Subject to both, it can’t get it right, so it forks over more of your and my money.

      That’s what you get when you put the numpties in charge.

      Here’s a simple change.

      1. Current accounts – like now – at risk in any default.

      2. No deposit insurance.

      3. A new type of account, a custody account. When you deposit money here, its yours, not the banks. On default of the bank, you get back 100% of your money. However, its going to come with charges and no interest. After all, the bank can’t lend it on.

      Nice and simple. Low need for regulation.

      Bad news for MPs, who make their money out of more regulation. Look how productive they are, they are passing laws left right and centre, even without looking at the details. Amazing productivity.

      • Conrad Jones (Cheam)
        Posted December 14, 2012 at 1:35 pm | Permalink

        You beat me too it Lord Blagger.

        Custody Accounts are the obvious way a Bank should work and the way many people still think they work. (Full Reserve Current Accounts).

        Savings Account risks should be borne equally by Savers and Banks. Then savers would take an interest in waht their money was being used for. Instead of “Savings” Accounts they would be known as “Investment” Accounts to clarify that the money – once deposited is no longer their.

        Who does Deposit Insurance really protect? If it only protected Depositors Money, why was Northern Rock bailed out? Surely the depositors money could simply have been moved to other Banks and Building Societies?

        Desposit Insurance does not protect Tax Payers, it provides Moral Hazard under the guise of protecting depositors while just forming a Smoke Screen around protecting badly run Financial Institutions.

        Of course – this is not the Keynsian Way; the mainstream economists are not interested in how money is created, handled by Banks or how Debt levels influence the Economy. They focus on Unemployment, Inflation, GDP, Taxation; but not Money, Debt and Banks.

      • uanime5
        Posted December 14, 2012 at 8:10 pm | Permalink

        If you ever try to implement this nonsense expect the British public en-mass to move their money in foreign banks which provide them with interest and protection against the bank defaulting.

        • Edward
          Posted December 16, 2012 at 10:36 am | Permalink

          Uanime5
          We are to take it that you would feel safer with your life savings deposited in a Greek Spanish Portugese or even French bank?

    • A Different Simon
      Posted December 15, 2012 at 12:33 am | Permalink

      That’s all well and fine but in return people need some satisfaction if their banks screw up like that and they and their families are expected to absorb the loss .

      The directors and officers of such banks should face the death penalty as they would in China .

      Believe me , this would cure the problem .

  5. Mike Stallard
    Posted December 14, 2012 at 6:49 am | Permalink

    Of course the banks should be as free as possible from government interference and of course those that risk their capital and who (like me) put their life savings into the banks for safe keeping should accept that we are paid, in effect, for taking a risk. Of course the banks are far too heavy a financial burden for the state and the taxpayers to support especially if they go under (I am just off to Iceland). And of course the government are really bad at regulating anything.

    BUT.

    Allow me to mention the elephant. Government debt is debauching the currency and therefore the banks, too, which organise and maintain the currency, are in deep trouble.

    • Lord Blagger
      Posted December 14, 2012 at 9:09 am | Permalink

      Government debts are hidden. It’s fraud.

      Telegraph headlines with it today. They are planning on taking money from the State second pension. State second pension – not on the books.

      2Fraud by false representation

      (1)A person is in breach of this section if he—

      (a)dishonestly makes a false representation, and

      (b)intends, by making the representation—

      (i)to make a gain for himself or another, or

      (ii)to cause loss to another or to expose another to a risk of loss.

      (2)A representation is false if—

      (a)it is untrue or misleading, and

      (b)the person making it knows that it is, or might be, untrue or misleading.

      (3)“Representation” means any representation as to fact or law, including a representation as to the state of mind of—

      (a)the person making the representation, or

      (b)any other person.

      (4)A representation may be express or implied.

      (5)For the purposes of this section a representation may be regarded as made if it (or anything implying it) is submitted in any form to any system or device designed to receive, convey or respond to communications (with or without human intervention).

      • Mungojerry
        Posted December 14, 2012 at 1:28 pm | Permalink

        The Fraud Act does not seem to apply to Government, Government officials and public servants.

        It would be far too expensive for an individual to mount a prosecution and the Crown Prosecution Service would give it the same priority they gave to prosecuting sex groomers.

      • uanime5
        Posted December 14, 2012 at 8:16 pm | Permalink

        If the Government doesn’t talk about this they’re not making any representations, thus they cannot be committing fraud by representation.

    • Conrad Jones (Cheam)
      Posted December 14, 2012 at 2:19 pm | Permalink

      Government Debt increased sharply from 2008 – not prior to that date. Government Debt had nothing to do with the current financial crisis.
      2008 – Government Debt was approximately 40% of GDP
      2011 – Government Debt was approximately 80% of GDP (DOUBLED IN THREE YEARS)

      GOVERNMENT DEBT DID NOT CAUSE THE FINANCIAL CRISIS, Government policy did that, with a little help from the Bank of England.

      The Finance Sector debt alone was 260% of GDP
      Household debt was 100% of GDP
      Business Debt was 110%

      The Government has increased it’s debt (our debt) to help bail out the rest of the Economy but still has less debt than all other sectors.

      If Government Debt is the Elevant in the Room, then Finance Sector Debt must be the Whale in the room closely followed by Business Sector and Household.

      Despite these levels of Private Sector Debt, the Government is still intent on a Policy to increase Private Sector Debt – even MORE!!!!

      Anything to keep that Exponential Debt Curve going UP!

      [Professor Steve Keen provided the above statistics, via ONS and Treasury Budget Report, it helps to be a Professor to squeeze data out of the ONS]

    • Conrad Jones (Cheam)
      Posted December 14, 2012 at 2:30 pm | Permalink

      Banks should be free of regulation – and freely alowed to go bust without bailouts, Governmet Subsidies, Deposit Insurance and free from immunity from prosecution when comitting fraud.

      In fairness, Banks could not operate unless they did act in a fraudulant manner, misappropriating funds and other such crimes, with the loving arms of Governments and Central Banks urging them on.

      The closed loop of degenerating values then reinforces itself by using the larger profits to finance Lobbyists, to influence Law Makers to make certain illegal Financial Practices exempt from prosecution, so providing more profits for more lobbying … etc etc.

      Ironically, this makes the Banks even more vulnerable to insolvency and at the mercy of Central Banks. Lehman Brothers being an example of a bank that had fallen into the ‘over leveraged’ trap.

    • waramess
      Posted December 14, 2012 at 2:51 pm | Permalink

      No longer is the medium of exchange a good store of wealth. The politicians and Central Banks have removed that entirely. Leave your wealth in bank deposits and it is common knowledge that in time it will be worthless if the politicians have not managed to steal it from you by other means.

      No longer do we have sound money nor do we have sound banks and all the regulation they care to heap on the system will not change that.

      We need to move on: Treat the banks like any other business and if they can’t pay their way let them go bust. Allow the insurance industry to provide the safety net for depositors and allow the government only to monitor the quality of the insurance provided .

      What has been suggested as a basis for going forward is rubbish proposed by confirmed incompetents in order to continue their grip on the system.

  6. Pete
    Posted December 14, 2012 at 7:50 am | Permalink

    Given the global disaster they made of the bailouts so far the best way for authorities to handle a bank collapse is to watch it on the television whilst working out how to fiddle their expenses and not interfering in any way. Let the markets sort it out, they do it quicker, cheaper and better.

    • Bazman
      Posted December 15, 2012 at 11:56 am | Permalink

      Let the managers just take massive risks and walk away with millions when it all goes wrong for everybody else. That market? Silly man. Stop fantasising.

      • Edward
        Posted December 16, 2012 at 10:45 am | Permalink

        No not that market bazman the market where banks are able to go bust like all other businesses.
        Not expensively nationalised by save the world Gordon

        • Duncan Black
          Posted December 16, 2012 at 6:45 pm | Permalink

          Indeed Edward – agree with you entirely. Allow true capitalism / free enterprise to work its magic – remove the incompetent and reward the wise / prudent. What we have is socialism (where the weak are propped up at the expense of the industrious) – don’t even want to use the term “Crony Capitalism” – because it is not capitalstic in any way to prop-up and encourage failure.

        • Bazman
          Posted December 16, 2012 at 8:21 pm | Permalink

          They were to big to fail. Not like any other business.

  7. APL
    Posted December 14, 2012 at 7:52 am | Permalink

    JR: “They are proposing a new regime where banks in trouble are put into controlled adminsitration effectively.”

    New banking regime. What the old banking regieme should have been.

    I suppose it is an advance on Brown’s & Balls policy of bankrupting England to keep the Scottish Labour vote up. Although judging by the fact that his constituents don’t seem to have noticed he doesn’t bother to turn up to Parliament since the general election, perhaps they wouldn’t have noticed if he had permitted RBS and HBOS the oblivion they so richly deserved either.

  8. colliemum
    Posted December 14, 2012 at 7:56 am | Permalink

    I can’t be the only one who has the distinct feeling that you, the politicians, at all levels, have totally lost control of what the banks, especially the Central Banks, do.

    Here’s an interesting report in the WSJ (not exactly a hotbed of anti-bank conspiracist theories), detailing the cosy relationship of the world’s central bankers – who happen to know each other from their times as students:

    http://online.wsj.com/article/SB10001424127887323717004578157152464486598.html

    Do you really think Parliament, or the Chancellor, can do anything against this coterie?
    I am beginning to have serious doubts …

    • Acorn
      Posted December 14, 2012 at 6:18 pm | Permalink

      All sovereign nations own their respective central banks. The FED; BoE; ECB etc, exist because governments bring them into existence by statute. The government delegates the issue of the currency to the central bank. The government can shut down or modify the CB mandate any time it feels like it. The government treasury and the central bank are one and the same at the macroeconomic level.

      The government of a sovereign nation that issues its own currency; and, allows it to be freely traded against other fiat floating currencies; never runs out of money. It can always pay any claim presented to it in its own currency. There is no limit to the amount of the currency that the CB can put into the “reserve account” of any commercial bank it licences. Commercial banks do not lend from reserve accounts. The CB can make amounts in reserve accounts disappear as fast as they created them. The CB can force a commercial bank to hold cash (a financial asset with zero maturity) they can lend to anybody, to holding financial assets with a thirty year maturity which it can only lend to a few other financial institutions should they want to accept it.

      Most governments choose to act as currency users so they can appear to their plebs, as if they are just like a household or a small business. This allows them to stand in front of TV cameras and say the taxpayers money is being squandered on immigrants and single mothers etc etc. When in fact, taxpayers money doesn’t actually fund anything, every pound the government spends is a new fresh number a computer put into a bank account. Taxation lets the computers reduce the numbers in those accounts. Thus, taxation is used to reduce spending power of households and business to control inflation. Getting the rich to pay a lot of it is purely a political / voter greed and envy preference, as long as somebody pays the required amount, the CB and the treasury will be happy. Every thing else is just smoke and mirrors politics.

      If you are a Eurozone nation, you are using a foreign currency, over which you have no control. If you are not Germany, you are destined to be in the soft and brown.

      • John Doran
        Posted December 17, 2012 at 10:26 am | Permalink

        Acorn hi.
        I’m afraid you are mistaken here.
        The FED is not owned by the US government.
        It is a consortium of private banks whose shareholders are secret.
        It’s accounts are never audited.
        As a private banking consortium it is of course acting in the interests of it’s secret shareholders,not the interests of the US public.

        The FED was established in 1913, & in the following century has debased the US dollar down to about 4 cents of it’s 1913 value, while managing the US economy so efficiently that the US national debt is 16+ trillion dollars.
        Mr Redwood has poohpoohed my previous opinions on the FED, but I do not regard it as an agency for the general good.

        (etc)
        Reply: We are not going to agree on these issues. The US Senate and Congress, and the UK Parliament, can change or control the Central Banks in their countries if they wish. I do not accept the conspiracy theories.

        • John Doran
          Posted December 17, 2012 at 12:00 pm | Permalink

          Ron Paul, a recent candidate for the US presidency, a Texas Senator for 20+ years, an advocate for ‘hard’ money & an enemy of inflation, tried to obtain an audit of the FED, including sight of the US gold reserves supposedly held in Fort Knox.

          He failed, & was treated with amused disdain by Ben Bernanke.

          That’s how in control the FED is.

  9. Alte Fritz
    Posted December 14, 2012 at 8:14 am | Permalink

    Quite right. There is a simple truth in this, which is that like wars and earthquakes, there will always be banking crises. As we plan for those, we should plan for banking quakes.

    • Bazman
      Posted December 15, 2012 at 11:50 am | Permalink

      There would not be if the managers lost all their money. At the moment the system is run for the players not the supporters. How much is the City taking in fees these days after their complete shambles, lies and fantasy? To much. Communism for the rich.

  10. Gary
    Posted December 14, 2012 at 8:31 am | Permalink

    The horse has bolted. A nominal $ 600 trillion mess has been left in the stable. Nobody can clean it up. It has infected the while world.

    Too late.

    • sm
      Posted December 15, 2012 at 5:35 pm | Permalink

      But the truth will set us free. If you fear penury , once you are living it or train yourself to face it , it holds no further fear -that’s why it will end – so i read somewhere. Just waiting for Spartacus.

      Meanwhile
      1) Glass Steagal seperation
      2) Higher capital requirements – no distributions – pay freeze and reductions.
      3) Reduced tax incentives for leverage more for equity.
      4) Insurance only allowed if you actually hold the physical economic risk associated with the contract for risk.
      5) Financial transaction tax (global)
      6) Land value tax/Wealth tax. (designed well like the BBC tax)
      7) Cap all above median public pensions -they cant be funded.

      and probably more

  11. APL
    Posted December 14, 2012 at 9:25 am | Permalink

    Off Topic & a question.

    Just listening to Desert Island disks where Eric Pickles is being interviewed. Here are some of the choice observations by the interviwer, Kirsty Young ( I think ).

    KY: ” … the huge fiscal hole that has grown under your parties stewardship .. ”

    Well of course it is true, but no mention of the fact that it was pretty Ginormous under Brown, Balls & Milibrain.

    KY: [ in relation to Pickles cufflinks ] ” … not swinging cuts for everyone … ”

    Kirsty Young, incredioulous on hearing Pickles came from a Labour household.

    And the question:

    Pickles says he has Ode to Joy ring out on his mobile phone when a certain EUrosceptic Tory phones him, would that mystery caller be you Mr Redwood? :)

  12. Richard1
    Posted December 14, 2012 at 9:47 am | Permalink

    The fact that this approach is becoming widely accepted is a tribute to the clarity of your insight in 2007-08, which was not shared by many politicians at the time. It also exposes the terrible mis-judgement of Gordon Brown and the Labour government, and should dis-qualify his principle henchmen, messrs Milliband E and Balls, from office in the future.

    Influential voices are (finally) calling for bank regulation to be made much clearer and much simpler: stop banks hiding losses (this was and probably still is rife) and introduce a rigorously tested minimum level of leverage (eg at 10% / 10:1). Thats all Basle III needs to do. Lets also then have a process for banks to be put into administration (run by the BoE if in the UK) if need be. This would have a multitude of beneficial effects: much less risky banks; removal of the implicit taxpayer subsidy of banks; proper market pricing of banks’ capital; & best of all removal of the main stick with which anti-capitalists attack free markets.

  13. Gary
    Posted December 14, 2012 at 10:20 am | Permalink

    Central banks underwrite moral hazard. They have no place in the market. They are the source of the problem. The way you regulate a market is you let bad businesses fail, not the next lot, next time, but starting here and now with the insolvent banks and the central bank enablers.

    you have now demonstrated on the record that you are not a free marketer.

  14. Acorn
    Posted December 14, 2012 at 10:34 am | Permalink

    Sounds a reasonable way to go. Debt holders into equity holders is good, it puts a slight twist on the idea that if you break it you own it signs you used to see in shops.

    The first priority must be to keep the payment; clearance and settlement part of the bank functioning. Government insuring retail deposits up to some level of moral hazard is nice with much better terms than a CDS type private insurance policy. The big mistake with Northern Rock was that the BoE and the big wholesale lenders, knew it was in trouble, but they kept it a secret. When the news broke, would you believe, there was a queue out the NR doors for the “99%” to get their cash back.

    The deposit insurance has to come with “a one hour pay-out guarantee”, to stop the queue. The 99% can’t afford to wait till the administrator gets all the creditor ducks in a row, in a years time, to get their money!

    BTW. Now we are fully globalised for real trade banking and casino banking (no public purpose; just gambling; pretend we are adding liquidity to the system); we really need an international lender of last resort. Effectively, a central bank for all currency issuing nations central banks. The BIS is the obvious candidate but it would need its own global currency and have taxing powers to back it I think. I will let the geeks work out the detail of that. The IMF has a currency but no taxing powers so we could do away with the IMF and the World Bank and the OECD. These supra national bureaucracies don’t add value, they just confuse and delay solutions and add a coating of more moral hazard.

    Casino banks that have no public purpose should be treated like any other corporate that goes bust and regulated by the same quangos that regulate Corals; Bet Fred; Ladbrokes and actual casinos etc etc.

  15. David John Wilson
    Posted December 14, 2012 at 11:40 am | Permalink

    There is a section of the population that is already on the breadline as a result of the current low interest rates. Any proposal that puts even more pressure on savings and pensions is totally unacceptable and this proposal will do just that.

    It is not just those who have managed to save during their life time but also those have been awarded compensation for various forms of injury who will be further disadvantaged. If the government really wants to continue down these paths then it must create a form of investment that gives a guranteed income after inflation.

    • zorro
      Posted December 14, 2012 at 7:30 pm | Permalink

      Dream on…..

      zorro

  16. peter davies
    Posted December 14, 2012 at 1:27 pm | Permalink

    Sounds like a sensible plan – strange how its taken 4 years to get to this stage.

    As @lifelogic correctly pointed out this should be accompanied by some sort of governance structure to ensure that shareholders can exert greater control over what directors do – shareholders who risk their capital need a stronger form of redress, how that should work in practice I have no idea.

  17. Lindsay McDougall
    Posted December 14, 2012 at 1:59 pm | Permalink

    Controlled administration, with shareholders and bondholders taking the pain, would work. And as soon as the next banking crisis comes along, and the government doesn’t bail anybody out with taxpayers’ money, a lot of the regulation could be abandoned – for the simple reason that banks would then invest a lot of effort in caculating risk accurately.

  18. forthurst
    Posted December 14, 2012 at 2:53 pm | Permalink

    Over the comparitively recent past, banking has become banksterism. These proposals do not address that issue. Corporations owned by shareholders have been treated as vehicles behind which people have operated personally to enrich themselves, burnishing their ridiculous egos, without any possibility of losing their own wealth or, as it now seems, having their collars felt even when their crimes were perpetrated in the City, so long as they were American owned and had paid their dues to Congress. ‘Products’ have been created which were specifically designed to fleece unsuspecting clients. Organisations which most people believe exist to make loans and take deposits have been gambling on their own accounts in stocks, commodities and numerous financial vehicles often using their financial clout to move markets in order to create adverse costs for legitimate market participants and, by extension, the public.

    Lots of complex regulations would be counter productive; as has been noted, this results in banks using lawyers to identify precisely how close to the wind they can steer rather than simply aiming to run a tight ship: clarity is required. I suggest an analysis of everything that has gone wrong leading up to the financial collapse, and incorporate each instance into the criminal law, if it is not already there, as it is in many cases, so that in future perpetrators would reasonablt anticipate losing their liberty and their wealth. A smaller financial sector would be a price worth paying if it was honest and reliable and primarily subserved the interests of clients, because it would stabilise and stengthen the real economy.

  19. sm
    Posted December 14, 2012 at 4:07 pm | Permalink

    Who will decide which banks live or die or get restructured and why and how can we ensure this is not arbitary or hijacked by some hidden or hidden in plain view interests?

  20. Martin Ryder
    Posted December 14, 2012 at 4:14 pm | Permalink

    Should there not also be a means of (a) removing the Boards of the banks that fail because of decisions taken by members of the Boards (b) preventing them, as individuals, from profiting by those decisions and (c) preventing them from sitting on Boards of other banks. One of the problems, I think, is that senior bankers, both in the US and the UK, see themselves as fireproof, whatever they do. They are, collectively, the captains of the ship; if they run it aground they should pay the price.

  21. Posted December 14, 2012 at 6:47 pm | Permalink

    Mr Redwood, yours is a typical political solution based on the imperative that depositor funds are to be protected and runs are to be eliminated.

    Why? Why?

    I realise you are coming from a position that you would never have allowed in the first place (had you been in a position to decide), but protection of depositor funds and taxpayer expense will be achieved in 99% of banks if 1% are allowed to fail.

    If the state regulates to provide soft landings this will perpetuate failure and not prevent it.

    The more the state does, the less we do for ourselves.

    In my view we need to drastically reduce bank regulation and allow a free market to thrive. Alternatively we should have a nationalised bank. This halfway house is the worst of all worlds.

    • Bazman
      Posted December 15, 2012 at 11:45 am | Permalink

      More free market fantasy. What has to happen to persuade you that often the free market does not work to the advantage of thee majority?
      Banking did have a free market by running rings around the regulators and look what happened. Why should my money be put at risk by bank managers who gamble other peoples money with no risk to their own or any consequences of loosing? It is not as if you can choose not to use the banking system. Loose your own money.

  22. Barbara
    Posted December 14, 2012 at 6:48 pm | Permalink

    I’m glad I’ve just got enough money to live on, a bit of a struggle at the moment, but managing, and the savings are mounting albeit very slowly. What’s the point in being wealthy these days any way, the taxman takes 45% and with bills rising all the time, and banks taking more and more and offering suspect investments, may be your better off just ticking along comfortably. Wealth who needs the hassle. I’m joking of course.

  23. Wilko
    Posted December 14, 2012 at 7:26 pm | Permalink

    The efficient way to handle bank crises is to prevent them. If the new regime described deals with banks in trouble, it has failed before even acting.

  24. Martyn
    Posted December 14, 2012 at 7:31 pm | Permalink

    Re Banksters and Mr C’s latest on the Eurozone being centrally controlled, and my earlier thoughts that the £UK would devalue to the extent that it could be said at some point ‘it is in the national interest for the UK to adopt the Euro, I see here that Open Europe thinks that we are already persona non grata and are out of the game….
    http://openeuropeblog.blogspot.co.uk/2012/12/banking-union-are-you-in-or-out.html
    Oh Dear, can it possibly be true that our banksters and governments of various colours have excluded us from being true Europeans in financial terms, since we are so very, very rich compared to other nations?

  25. Jon
    Posted December 14, 2012 at 8:08 pm | Permalink

    Does this cover the derivatives? Banks were selling CDS’s to mitigate risk but then another part of the bank would buy up the same swaps.

  26. uanime5
    Posted December 14, 2012 at 8:29 pm | Permalink

    Another good solution is to prevent banks engaging in risky practices from having depositors. Thus they can go into administration without causing large political problems.

    In other news it seems that trying to privatise interpretors for court cases was a massive disaster which lead to thousands of cases being postponed or quashed because the private company ALS wasn’t able to provide the interpreters (just like G4S couldn’t provide security staff).
    http://www.independent.co.uk/news/uk/home-news/mps-dismayed-by-total-chaos-of-42m-lost-in-translation-8413694.html

    Also according to Sir Roger Carr, the CBI president, leaving the EU would be very bad for the UK:
    http://www.telegraph.co.uk/finance/businesslatestnews/9687876/CBI-chief-warns-UK-against-EU-exit-vote.html

    • zorro
      Posted December 15, 2012 at 3:48 pm | Permalink

      With regards to banks, a Glass Steagall firewall is the only way to effectively contain these disasters. Steady productive growth is better than a dash for growth which might lead to an even bigger bust….

      The interpreting fiasco was entirely predictable and they were made aware of the risks. Doubtless, the people who ‘implemented’ this ‘solution’ had no idea about the real business needs just some pie in the sky profit line….

      I will beg to differ with regards to the CBI….

      zorro

    • Edward
      Posted December 16, 2012 at 10:56 am | Permalink

      Perhaps it should be the responsibility of the person who needs an interpreter to find one.

  27. Mark
    Posted December 14, 2012 at 10:46 pm | Permalink

    I read that the US regulators are demanding that foreign banks maintain assets in the US to support their business there.

    http://www.bloomberg.com/news/2012-12-14/fed-targets-foreign-banks-with-stricter-capital-rules.html

    Meanwhile the US CPI fell on lower energy prices, and EU car sales reach a 20 year low.

  28. David Langley
    Posted December 15, 2012 at 3:24 pm | Permalink

    We have to have banks, the governments pays pensions into banks, wages into banks and money is rarely seen on pay day, it goes in the bank. You have to have an account and then you are in the banks clutches. If you decide to invest in the bank because you believe it is a secure and reasonably profitable home for some of your cash you take a risk. The dividends reflect that risk. I do not invest in casino banks and I do not agree with the obscene bonuses paid to traders, and investment bankers who all seem to believe that they are peeing in the same pot as the retail bankers. My risk is with retail banking practice which should not require government bailouts and rescue just like any other commercial entity.

  29. Mark B
    Posted December 15, 2012 at 7:20 pm | Permalink

    The way to deal with banks’ and bankers’ is simple. You do things the Icelandic way:
    1) Liquidate all insolvent banks’.
    2) Refund depositors’ their monies.
    3 Jail the bankers’ who caused the problems in the first place.

    Compensate the victim, punish and make an example of the criminal, thereby serving as a warning to others.

    You could also increase competition in the savings and loans market, particularly to SME’s.

    More local banks’ similar to that in Germany, were loans to SME’s are made at lower interest rates and defaulting on such loans is lower than elsewhere.

    Deposit Protection up to say £5,000 for those lending to internet loan companies, who intern, lend to individuals and SME’s at low rates.

    Its not a perfect answer to everything but, someone with your background in banking would be able to appreciate.

  30. gyges
    Posted December 15, 2012 at 11:17 pm | Permalink

    I appreciate that this comment may be obscure to your readers but hopefully, not to you, John.

    In view of the banking crisis and the continued oppression via the banks, do you think that the Wages Act 1986 was a terrible mistake, do you think that Ken Clarke owes us all an apology for his monstrous behaviour in pushing this act through Parliament, and that Claire Short’s reservations had some merit?

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
    Published and promoted by Thomas Puddy for John Redwood, both of 30 Rose Street Wokingham RG40 1XU
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