Lord Turner is an intelligent and hard working man. He is untainted by the failures of the bankers and their regulators over the last giddy decade of excess credit. Let us hope he shows some wisdom in responding to the present crisis, and let us hope he understands that Regulators have to look ahead. The issue today is not how we stop the last crisis, but how we stop the next one. It is likely to be different from the last one.
Leaks imply the authorities now think banks should be made to hold more in cash and government securities. They should ask themselves why they want to feed the bad habits of the last heavyweight debt junky left on the bloc – the UK government.
Shouldn’t the Regulators be warning that the next problem could be a government debt problem? Shouldn’t they say to banks that lending to the UK government at very low interest rates has in the past been a very unrewarding pastime. It is true the government may print enough money to buy enough of its own bonds to drive the prices higher in the short term. But won’t there be a day of reckoning? Doesn’t the turbo buying have to stop at some point? What happens then? Couldn’t the banks all lose money if they hold too much government stock bought at high prices? How does that strengthen them?
Leaks also suggest they want to impose a limit on lending to people buying homes of three times income. They are right to think that interest rates are going to have to go up again. It would be wrong to calculate how much mortgage people can afford based on current low rates of interest.
A three times limit is well below the limits banks and Building Societies have been applying in recent years. It implies the authorities want to see a further substantial fall in house prices.
There is a case for driving prices lower again. Some of my correspondents have made it, saying it is high time homes became more affordable. A young person or couple starting out today still faces a house price mountain to climb to get their first owner occupied home.
Such a policy also means further distress for the banks, as lower house prices will leave many more mortgage loans they have made higher than the value of the property which is their security. It means weaker banks for longer, as the adjustments take place. That in turn means fewer mortgages, driving the price of homes down further. It means fewer jobs – fewer jobs building homes, and fewer jobs elsewhere, as lower house prices means lower consumer confidence.
One thing we can do without is yet another regulator, the Euro regulator, coming in to the game on top of everything else. We need simplicity and clarity, not more expense and more complexity. One of the worst features of the banking world in recent years in the UK has been the lack of choice and competition on the High Street for our banking business. More levels of regulation will mean more barriers to entry, and even less banking choice.
Would counter cyclical regulation of banking cash and capital be a good idea? Asking banks to have more capital in the good times, to protect them in the bad times? Yes it would. Will the Regulator be able to judge the cycle? Time will tell. The Regulator will be more likely to get that right if he is not trying to do too many other things as well. The problem with counter cyclical regulation is you need to be able to read the cycle. That was clearly beyond both the banks and their regulators in recent years.
By definition the regulators will not stop the next crisis. By seeking so many ways to stop the last one happening again, they will doubtless be looking the wrong way for the next one.