The new Governor comes with a great deal of goodwill and cross party support. All want him to succeed. Success means using monetary and banking policy to promote faster and sustainable growth. Dangers include allowing a new asset bubble or two to overheat, and failing to do enough to spur the UK economy in the right direction. The latter is probably the bigger worry for more people.
The new Governor also has at his  disposal a wide range of powers he can use  and measures he can pursue. He is both the regulator of the commercial banks,and the fixer of the main short term interest rate. He can both advise on whether to buy in more government bonds and other instruments, and influence the balance sheets of all the main commercial banks in the system. He is both Chief Regulator and a major player in the financial markets.
The central anomaly in recent policy has been the divergence between the wish of the banking regulators, who want bank balance sheets to carry on contracting so banks have much more capital relative to their loans outstanding, and the Monetary policy Committee, who have wanted to increase the amount of money in circulation, which should mean expanding commercial bank balance sheets. Some Regulators now say they want banks to lend more whilst raising their capital ratios, or keeping a b igger reserve. In practice their requests to do this have not been implemented in the main, as banks have struggled to be profitable enough to justify more business, and do not think they can raise large amounts of new capital from the markets. RBS has reduced its balance sheet by £900 billion to try to improve its capital ratios. The government would not have been keen to put huge new sums into its share capital instead.
Most money today is not held as bank notes or gold coins, but held as deposits in commercial banks. It is deposit account and current account money that makes up most of the money supply and is what most of us and companies  rely on to pay our bills and make any investments  business can afford. If the authorities now want a faster expansion, they need to accept that more money will be held in bank accounts. The balance sheets of commercial banks will therefore exapnd, as your or my bank balance is the commercial banks’ liability.
They need to put our money to work. They need to lend a sensible amount of it on to make a profit. We will have stronger banks if they make a bit more money and keep some of the retained profit to strengthen their position and finance more loans. Demanding more capital and demanding more lending can be like trying to drive with your foot hard down on both the accelerator and the brake. The brake tends to win. How to have both stronger banks and finance a decent recovery remains the central policy conundrum. Sorting out RBS is central to resolving this issue. Moving on from treating the banks as the whipping boy for all the ills of society may also be necessary if we are to make faster progress.
July 2, 2013
The banks are not lending because it is not in their profit making making interest to do so with record low interest rates. Also why should they take the risk to make loans to businesses, on the basis that any competent businessman/lady would not want to borrow anyway because the demand is just not there. Similarly who would want a big mortgage when house prices are still way out of kilter with average earnings? The banks are partially doing now what they should have done prior to 2007/8 i.e. lend prudentially
You will have a more stable banking system when the UK gets its own Glass Steagall, jail time for fraudsters and no pensions or big fat juicy payoffs for incompetents like Goodwin (etc ed)
July 2, 2013
The banks are charging good margins when they do lend (they are not lending at the 0.5% base rates more like 3.25% to even to the best borrowers. The real problem is, as usual, the daft government with their one size fits all liquidity rules. Fighting yesterdays problem with a steam-hammer to miss the nut.
Of course they would have more confidence in lending with cheaper, non religious energy, a smaller state vision, far less EU and a sensible non socialist government without the grim reapers Miliband & Balls looming shortly.
July 2, 2013
Many businesses are paying up to 30% from the rip off banks in total desperation. Meanwhile the government seems happy for people to pay 4000% APR to payday lenders. Why has Cameron not acted? Do they have some party donors in the business or lots of MP’s paid “consultancies”. No one benefits from a loan at these absurd rates (unless they never repay) that is. These lenders are dealers in misery for the dim & desperate.
Cap the rates now kill this misery industry please.
July 3, 2013
Does this same ‘logic’ not apply to rip off employers or are their none?
July 3, 2013
If anyone feels that they work for a “rip off employer” they should just get another job and they will be ripped off no more. One assumes they stay because they prefer it to the alternatives?
July 4, 2013
Maybe there is no alternative? They could always get a loan. Have a ‘think’…
July 5, 2013
There are always alternative you just have to look and think a little to find them.
July 6, 2013
A worse job further away and often out of the frying pan into the frying pan. Your ideas of creating a market in desperation with workers undercutting each other is hardly an alternative. I understand that you think they should either take to the stage or become doctors, but this is as likely to happen as you loosing weight.
July 2, 2013
Nina, you say “when the UK gets its own Glass Steagall”, the chances are slim in present circumstances. JR would press the delete button on me if I said more. Anyway, our new BoE Governor is not in favour of the Volcker Rule. In the US, the Republicans in Congress are doing their best to crush it and anything that looks like it.
The1999 Financial Services Modernization Act, killed the Glass-Steagall Act, in the US; the banksters got their way. The UK enacted similar legislation under pressure from US Banks resident in the UK. The seeds of the 2007 crisis were sown that year.
JR may delete this bit with me saying; London (allowed things the US regulators would not allow-ed)
(unchecked ref removed)
July 3, 2013
Glass-Steagall is pretty useless (if by G-S you simply mean separating investment from retail banking and letting investment banks fail). Lehmans was an investment bank and its failure caused chaos. Moreover, Vickers was more or less G-S writ large, and the Vickers commission didn’t have the balls to say whether they’d let large investment banks fail. Useless.
July 2, 2013
It is all very well to try to defend the banks like this as the poor man caught in the middle, but it isn’t true.
1 The banks are at fault for trying to make too much of a turn out of middle England, sucking on the taxpayer at one end and fleecing them personally and as businesses at the other end. Interest rates in and out tell the story, as do arrangement fees etc.
2 The government is still at fault for trying to maintain uncompetitive practices in terms of too rigorous employment laws, too much tax and government spending, which means that this Country is no environment for the brave to take business risks.
By apparently defending the slow pace of change under this government and suggesting perhaps a slight removal of the foot from the brake so that banks can have another one-way punt you are close to defending the indefensible.
The way this should work is for deregulation at government level and more competition at bank level. That’s what you should be arguing for primarily, not just for tinkering with the rudder in a sea of treacle.
July 2, 2013
@JimF: Germany has far more stringent employment laws than the UK does, they also have very strong trade unions, funny how Germany manage to not only survive economically but expand and invest in their businesses…
I’m not calling for greater employment protection laws, just that some are putting far to much weight onto them as a cause of the UK’s economic problems.
July 2, 2013
There is a big lack of competition in banking, mainly due to poor government regulations and far too many barriers to entry. That is the reason they are able to extort these high margins and fees and continue with large over payment of, often rather dopey, staff.
July 2, 2013
Annual bonuses for the banking industry in the UK total around ÂŁ12 billion. This is capital removed from balance aheets.
Paying this money out of a company when there is a regulatory requirement to hold it is surely negligent behaviour by the directors and shareholders.
If no banks pay bonuses there is no reward competition (assuming it is not paid as salary which it should not be if it is needed for capital) so the argument about retaining staff is moot.
Monetary policy demands that excess reward is reigned in until balance sheets are repaired.
July 2, 2013
Similar considerations apply to taxes on banking such as Bonus/payroll tax, balance sheet tax, Tobin Tax, and fines for misconduct (unless directly applied in restitution to wronged customers). When banks lend, they often impose covenants restricting the payment of dividends if their loan might be imperilled beause of inadequate profitability or balance sheet strength. Bailout funds should have come with similar conditions attached restricting employee compensation.
Penalties for miscreants should be in the form of bans from financial work – in the most egregious cases via spells in jail, and any fines levied at a purely personal, not corporate level – effectively amounting to clawback of unjustly earned bonuses.
July 2, 2013
In line with the EU’s preferred model Brown gave the Bank of England a certain degree of “independence”, although by no means the same degree as that enjoyed by the ECB; and he also split off the supervision of commercial banks from the Bank to a separate regulator, the FSA, which move has now been reversed by Osborne.
Maybe that division of responsibilities could have worked if Brown had appointed somebody better than Sir Callum McCarthy as Chairman for the first five years of the FSA, until he was allowed to slink off the stage in October 2008 leaving behind (problems-ed); although I do note that the Irish have gone through a rather similar process of first detaching supervision of commercial banks from the central bank, and then re-integrating it more closely with the central bank, so maybe the model itself was irremediably flawed irrespective of the personalities involved.
However it’s not clear to me that the Bank should have a free hand to determine how quickly banks must shrink their balance sheets and/or build up their capital bases, given that JR’s “contradiction in monetary policy” is clearly not just a matter of monetary policy but wider economic policy.
I come back to the last MPC Remit Letter that Osborne sent to the Governor on March 20th 2013:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/185552/chx_letter_to_boe_monetary_policy_framework_200313.pdf.pdf
in which he attempted to explain his economic strategy, with “supporting the flow of credit in the economy” being one element of the first of “four key pillars”.
It could be argued that if the Chancellor is prepared to take the risk that increased lending by banks could leave some of them exposed if there was another economic shock, then the Bank should accept that as his judgement of the best way forward and slow down on regulatory actions which may be beneficial in the longer term but clearly work against his stated policy in the shorter term.
July 2, 2013
As one of the people who has had to pay back about ÂŁ2.2M to RBS/Natwest, when the funds were not remotely at risk, simply because RBS was desperate and needed to meet capital requirements. I have thus delayed investments as a direct result and about 6 new jobs have thus been lost. At that ratio ÂŁ900 billion less lending might have cost nearly ÂŁ2.5M new jobs everywhere. The government shooting itself in the foot as usual.
Meanwhile we see waste, anywhere we care to look, in the appallingly run state sector. The good old BBC for example, with ÂŁ25m severance bill for just 150 managers. Why on earth did Cameron approve Lord Patten to chair the BBC trustees? He seems to me (rather like Cameron) to almost personify a complaisant, pro EU, quack green, ever bigger state, tax borrow waste and a contempt for the electorate, tax payers and licence payers.
As you say like driving with one foot on the brake and the other on the accelerator with the brake winning. If the government could just have stopped RBS sucking back funds from sound businesses for the past three years, the economy would be in a hugely better position now. The bank would even have made a good profit on these loans, as the ones who have been able to pay back were clearly not going to default anyway.
July 2, 2013
Has QE not made any serious difference to reserves? It won’t do much for the M1 in circulation but surely it has propped up bank’s balance sheets.
With regards lending, I can’t see how we shall have lots of money to lend to businesses with interest rates kept very low and heavy intervention. Right now there is no incentive for savers to place their money with banks in any type of deposit account or savings account. Banks can do all their business via the government and BoE rather than the traditional idea of receiving and lending money from their customers.
As an aside, what level of lending do the BoE want to see. Obviously it will be a lot lower than pre 2008 levels as that was unsustainable or at least I am hoping their targets are much lower than that
July 2, 2013
QE has replaced the emergency funding from the Special Liquidity Scheme and the Credit Guarantee Scheme which were about the same size in total.
July 2, 2013
It just goes to show that there is no situation so bad that a regulator cannot make it worse. I recall both the retiring Governor and the Chancellor saying they wanted to bring about a situation where no bank was too big to fail. May we have a progress report on that, please?
The BoE should stick to its knitting and do it better. It should define an inflation index that is suitable to use for inflation targetting. It will not be CPI or RPI. It should include asset prices, particularly house prices, and exclude VAT and excise duty. And if it is told that 2% is its inflation target, that’s what it must be. The Bank should also provide a reasonable time frame for getting rid of QE, raising interest rates to sound levels and moving to zero inflation. Monetary policy can only influence economic growth over the short term, and even that depends on households taking on more debt. So leave fiscal policy and economic growth to the Chancellor.
July 2, 2013
The ECB defines its own inflation target, but the Bank of England does not.
The EU treaties say:
“The primary objective of the European System of Central Banks (hereinafter referred to as “the ESCB”) shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union … ”
By a strange and entirely inexplicable coincidence, Brown adopted a comparable approach for Section 11 of the Bank of England Act 1998:
“11 Objectives.
In relation to monetary policy, the objectives of the Bank of England shall be –
(a) to maintain price stability, and
(b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.”
However there is nothing in the EU treaties comparable to Section 12, which says that the Treasury shall tell the Bank what is meant by price stability and what economic policy it should support.
As for QE, the Bank cannot do that without written legal authorisation from the Chancellor.
July 2, 2013
So the BoE isn’t really independent after all. No matter. If the BoE gives the Chancellor good advice, no doubt he will take it. It’s none of the EU’s business. At any time we choose, we can tell them to shove EU law up their backsides.
July 4, 2013
It has a kind of independence for monetary policy, insofar as Section 10 of that 1998 Act specifically excluded the Treasury from giving it any directions in relation to monetary policy:
“10 Operational responsibility.
In section 4(1) of the Bank of England Act 1946 (power of the Treasury to give directions to the Bank), at the end there is inserted “ , except in relation to monetary policy ”.”
But Section 11 sets the objectives for monetary policy and Section 12 lays down that the Treasury will decide on what is meant by price stability and what the government’s economic policy may be.
Moreover there is a Section 19 on the Treasury’s reserve powers, under which the Chancellor could ask Parliament to agree to the temporary suspension of the normal independence and instead allow him to go back to giving directions on monetary policy.
And as for QE, because the Treasury has indemnified the Bank against losses on its asset purchases the Chancellor has to write a letter authorising each new tranche.
July 2, 2013
I need you to indulge me today JR, let me pass moderation, live a little, because this is important. Very few people in the media and politics understand the fundamental difference between Monetary Policy and Fiscal Policy, used in a sovereign fiat currency economy. Like wise, they don’t understand that there are two types of money, Sovereign money – notes coins and reserves at the Central Bank held by the Clearing Banks; and, Private Bank Money, that circulates around the economy. The first one is not convertible to anything; the second one is convertible to the first one.
Dan Kervick at NEP says:- “Remember everyone that on the MMT picture, the term “government” refers to the consolidated government, which is the Treasury + Fed combined. In order for there to be a net increase in government liabilities held by the non-government sectors of the economy, the consolidated government has to spend more than it receives. But in principle, the spending could be from the Fed. For example the Fed is constantly pumping dollars into the economy as it pays interest on reserves, and every time it purchases a financial asset from the private sector. Even if the Treasury were running a balanced budget, the consolidated government could be running a deficit if the Fed is emitting more government liabilities than are being extinguished by payments to the Fed.
The practical need for a Treasury deficit arises from the fact that a consolidated deficit due only and entirely to the Fed [ monetary policy action; Acorn] might only impact bank reserves without influencing the non-banking sectors of the economy. Bank reserves could be increasing due to a Fed “deficit” while bank lending is stagnant. The private sector as a whole could thus have a greater net stock of financial assets, because the banks are themselves part of the private sector. But the productive agents that we most need to increase their net financial assets – households and non-banking businesses – might be standing still and not accumulating financial assets. […] When the Treasury deficit spends [fiscal policy action; Acorn], and the Fed accommodates by purchasing at least some of the Treasury’s debt, then not only are government liabilities to the banks’ (reserves) increased, but liabilities of the banks to the non-bank sector […] are also increased, whether or not banks expand their lending.”
You should read all of the post, including the comments at: “What Does Paul Ryan NOT Understand about Reserve Banking?” (Google it)
July 2, 2013
Off topic, more unwanted unwarranted and probably counter-productive interference from our unelected masters in Brussels:
http://www.telegraph.co.uk/finance/personalfinance/borrowing/creditcards/10153653/EU-rule-could-force-11-debit-card-charge-on-Britons.html
“EU rule ‘could force ÂŁ11 debit card charge on Britons'”
“Customers have been warned that a proposed change in European Union rules may force banks to introduce annual charges of ÂŁ11 on debit cards and ÂŁ25 on credit cards.”
Incidentally yesterday my wife went to the bank to transfer ca ÂŁ5k to pay for the re-wiring of our house, and came back without having achieved that because she hadn’t thought to take her passport.
A customer continuously for decades, back to the days of National Provincial; she had our current account number, and it was perfectly clear on the screen that a suitable sum had recently been put into the account in anticipation of a bill of that kind of size; she had the invoice, actually addressed to her, with a description of the work and itemised costs, and she had the firm’s account number for payment of the bill; but crucially she didn’t have her passport, and so although she had previously been allowed to transfer enough money into our account to cover the bill without any question she would not now be allowed to transfer that money out of our account to actually pay the bill.
So let’s guess where that insanity originated.
(But I suppose it’s conceivable that somebody could turn up at the branch of a bank pretending to be somebody else, a customer of long standing, and try to get ÂŁ5k of the proceeds of their international drug trafficking transferred on from that other person’s current account – into which the dirty money had recently been deposited without that other person even noticing – to criminal accomplices masquerading as a local firm of electricians pretending to have rewired a house and producing a fake invoice, and of course we should spare no efforts in combating that kind of thing … )
July 2, 2013
“Customers have been warned that a proposed change in European Union rules may force banks to introduce annual charges of ÂŁ11 on debit cards and ÂŁ25 on credit cards”
Luckily I have a credit card which was guaranteed to have no annual charge for life. Maybe unluckily it is from then Co-Op bank …
July 2, 2013
Roy
“…..Guaranteed to have no annual charge for life”.
Yes, then they just stop any further issue of that card, so its life is up !
I have learned from bitter experience that no guarantee written or otherwise, and in particular anything Financial, is not worth the paper it is written on.
Guarantee for life:
Yours, the cat, the dog, the house, or the card expiry date ?.
Ever had a letter changing terms and conditions mid contract ?
July 2, 2013
I’m surprised “free” banking has lasted this long. When it was introduced the interest on cash held in current accounts helped pay for it. Given the near 0% interest rates this hidden subsidy has gone.
Interestingly much of travel trade already charges to pay for air fares and package holidays with a credit card.
Who knows as to whether the partisan speculation in the Telegraph is right? Let’s face our own government might be happy with this or even be pushing it behind the scenes. The UK government has two bank groups to fatten up for a future sale.
July 2, 2013
You left out the part where the EU is trying to cap or ban “interchange fees”, which are imposed on retailers by the transaction firms (credit card companies). You also left out the part that banks aren’t going to be forced to introduce annual charges but are likely to do so in order to continue making large profits.
July 2, 2013
As I gave the link anybody could read the background, which is that if the EU stops the credit companies charging retailers then they will have to directly charge the retailers’ customers instead. Not so they can “continue making large profits”, but so there would still be a viable business. They are extending credit, many cardholders pay off their bills every month and pay them no interest at all, others do pay interest but some of them eventually default and those losses have to be borne, so if they no longer collected fees from retailers and they didn’t replace that revenue by charging cardholders an annual fee then it’s unlikely that the business could continue.
July 2, 2013
Central economic planning by committee, or worse by the cult of personality. Hilarious! If it was not so serious.
What are the chances of this succeeding? About the same as the soviet politburo 5 year tractor plan.
Btw: canada has been left with the mother of all property bubbles which is now bursting. Some success.
July 2, 2013
It is all a puzzle. The government want the banks to lend more whilst the regulator wants the banks to increase their capital ratios and, notwithstanding the enormous froth on the stock exchange, there are no IPO’s no new issues no new bond issues- on the contrary the corporates are repurchasing their previously issued bonds.
The government desperately want the corporates to spend their cash piles, even by force, it is said, but the corporates think otherwise
It seems to me that only the people that think they run the country want growth; the people who actually run the country want something else entirely.
Maybe it is time for the government and the Bank of England to put their egos to one side and sit down to examine why they are so out of tune
July 2, 2013
Seems to me everyone just wants to manipulate figures to make them read what they want to.
A bit like so called “creative accounting”
All because the real sums do not add up !
July 2, 2013
Or conversely , why should we invest our money in banks when due to low interest rates we cannot recapitalise either? My savings account increased from 0.1% to 0.48% …wow!
July 2, 2013
A Balance Sheet is a statement summarising the financial condition of a company. To state that RBS has reduced its ‘Balance Sheet by ÂŁ900 Billions’, is therefore ambiguous.
Has it reduced its debts by that amount or its assets? Or its expenditure? Its profits? (they wish!) Or its losses? Without the qualifier, I do not know what they are really saying and I do not know whether it is good or bad. I do know that Labour made a big big mistake using tax payers cash to bail them out but as usual no politican’s head will roll for creating the disaster.
And now that King has left the BoE and better late than never, he admits the the zero interest rate policy was held to save the debtors at the expense of the savers. Of course he did not mention that the High Street banks were the worst of all debtors and his plan to have all debtors pay down their debts, did not work out so well. Why did he not listen to Prof Hayek?
Reply It has contracted its assets and liabilities as described
July 8, 2013
I remain none the wiser. Or have liabilities now become assets?
July 2, 2013
Banks need to be able to route money to the productive economy. They can’t do so while they have it tied up in mortgage ending, or lending overseas with severe sovereign/credit risk.
It’s worth reading through the latest Financial Stability report:
http://www.bankofengland.co.uk/publications/Documents/fsr/2013/fsrfull1306.pdf
It provides a lot of information about the state of banking and of bank customers in Sections 2 and 3. These should inform policy, and it can be seen from the later sections that policy is being driven too much by international institutions rather than domestic common sense. The fingerprints of Mr Haldane can be seen in some of the reporting – for example the web exposure diagrams in Chart 3.17 that shows we now have just one 800lb gorilla at the hub of the system that is exposed to almost all the others,
I have started some analysis based on the new sets of information available from the Land Registry. By looking at the volume of sales month by month and region by region in conjunction with the average regional price for the month it’s possible to build up a picture of exposure to house price falls in England and Wales, and in turn the implications for bank security at different LTV levels at the time of purchase. It’s quite clear that bank resilience would be greatly improved by taking advantage of low interest rates to encourage early partial repayment of high LTV loans – doubly so when you look at the data in the Financial Stability Report that shows how small a rise in rates would stress many borrowers.
July 3, 2013
JR, There is just one whapping great flaw in your argument: there is no evidence to back the popular myth that businesses are actually being constrained by lack of access to finance or credit. The following three employer surveys show that access to finance comes a long way down employers’ list of problems.
http://www.ft.com/cms/s/0/41d9bc4e-fbc7-11dd-bcad-000077b07658.html#axzz2WV0ffia0
p.7 here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/193555/bis-13-p74-small-business-survey-2012-sme-employers.pdf
Section 2.7 here: http://www.britishmarine.co.uk/upload_pub/Industrytrendsreport%28Nov11toMay12%29.pdf
Reply Why then do MPs have regular complaints from businesses abnout withdrawal or non availability of business finance for businesses that look reasonable financially?
July 9, 2013
If there is a significant disparity between what surveys tell us and what employers tell MPs, I’m not sure what the explanation is. It could be that MPs elicit the answer they expect to hear from employers when visiting employers’ premises: e.g. leading questions like, “do you have problems accessing credit?”.
Or it could be that employers who contact MPs of their own volition are non-typical: they could be people who are prone to blame someone else for their problems and expect politicians to sort the problem.
I know that Lord Sugar thinks that businesses that cannot get credit for viable projects are just incompetent.
July 3, 2013
How to resolve the contradiction?
A strategy which does not favor incumbents.
Encourage & subsidize (via QE grants if required) the supply of new domestic banks (free of past mistakes), who can then take advantage of suitable opportunity- with golden shares to prevent the badboys buying them out.
Vastly less rules if new banks and new bank directors & shareholders assume unlimited risk.
For existing publicly supported banks, a good bank , bad bank might resolve the problem where finance is sucked back from the good (because it is possible) without taking losses.
Distribution caps applied by the PRA or similar, to senior management renumeration, dividends,interest payments to bondholders.
Put plans in place to reduce interest only loans.
In terms of the non bank-economy, use QE to fund reductions in employers/employee’s national insurance and also consider direct per capita QE to mandatorily pay down debt.(Per Steve Keen)
A Glass Steagall Act.
Make it illegal for banks to fund political parties or political activities.