A Chancellor and Governor who aren’t at war – we’d better get used to it
My week: Discord between the Chancellor of the Exchequer and the Governor of the Bank of England is such a distant memory that is was interesting to hear both incumbents of the roles dig deep into the history books to find some at the annual Mansion House bankers’ dinner on Thursday night.
First of all George Osborne reminded diners that Mark Carney was not the first Canadian to address the City set-piece event. That honour belonged to the New Brunswick-born Andrew Bonar Law, who 97 years ago was the Chancellor in Lloyd George’s War Cabinet. Bonar Law fell out spectacularly with the Governor of the day, Walter Cunliffe, easing him from office when he was prevented from getting his hands on the nation’s gold. Cue joke about Gordon Brown’s bullion sell-off.
Mr Carney responded with a tale about Cunliffe’s successor, Montagu Norman, who fled to Quebec in good time just as the sterling crisis forced Britain off the gold standard in 1931.
Of course, there have been great tensions since, not least between Alistair Darling and Mervyn King in the handling of the financial crisis. But in his first year as Governor, Mr Carney has had to make it clear that he is not too close to the Chancellor, rather than being at odds with him. It doesn’t help that the Bank was handed a growth remit on top of its economic stability role, something that’s impossible not to view through a political lens.
The truth is that both men have benefited from a rising tide of economic recovery. Everything is going so well that Mr Carney has been forced to change his tune quite sharply. Last month he cooled expectations of an early interest rate rise by saying that the economy “has started to head back towards normal”, only to stoke them again this week with advice that an increase “could happen sooner than markets currently expect”.
If there has been any tension, it has been over the closely watched housing market. Before anyone really knows how the Bank’s new Financial Policy Committee will operate, Mr Osborne has piled new powers on to it to cap the ratio of mortgages to family incomes as a precautionary measure. Mr Carney has made it clear that there is much he can do to prevent a housing bubble, but the Bank cannot, for example, rein in super-rich cash buyers in London any more than it can mix the cement to address the lingering supply problem.
In tackling that, Mr Osborne could do worse than listen to Nigel Wilson, the boss of insurer Legal & General, who told me this week that a focus on the “last-time buyer” – in essence, building more modern retirement homes – would free up housing stock for families and release equity into the economy.
Mr Osborne might have fluffed his Churchillian lines at Mansion House on Thursday night, talking about the “beginning of the end” when he meant to say “end of the beginning”. But given a following wind from the electorate next spring, this is a partnership that will run and run – unlike some of the warring antecedents of Messrs Osborne and Carney.
Is time already up for the European Banking Authority?
In the three years since it was established in the Square Mile, the European Banking Authority can hardly lay claim to having become one the City’s great institutions. Its chairman, Andrea Enria, the former head of bank supervision at the Bank of Italy, is well thought of but has a very low profile. The EBA’s base in Tower 42, the old NatWest Tower, has been subject to more attention recently because the renowned chef Jason Atherton opened the new City Social restaurant on the 24th floor.
The regulator was London’s prize when Europe’s old system of financial supervision was scrapped after the banking crisis. Its sister supervisor, the European Insurance and Occupational Pensions Authority (Eiopa), went to Frankfurt, while a third, the European Securities and Markets Authority (Esma), set up shop in Paris.
Part of the EBA’s remit was to carry out stress tests on the balance sheets of European banks. Since then, the world has moved on. The European Central Bank has been carrying out stress tests of its own as a precursor to setting up a eurozone-wide banking union that will create a backstop for sickly lenders and be useful in restoring confidence for the long term. The exercise has already coincided with Deutsche Bank raising £6.5bn to boost its capital position and more banks will follow.
It means that the banking union could be up and running by October, as long as national regulators willingly give up some of their supervisory powers to the ECB. It raises the question of whether the EBA starts to look surplus to requirements.
One answer, as the Brussels-devised cap on bankers’ bonuses has reminded us, is that rules need to be written after legislation has been fixed. The European Parliament and Council of the European Union agreed a bonus cap of one-times salary, rising to twotimes with shareholder approval. They left the EBA to sort out the detail, which gave banks including Lloyds and Barclays a window of opportunity to load up top staff with extra allowances.
Bankers insist that working on the fine print of the banking union will keep Mr Enria and colleagues busy for some time.
Given that British banks will be outside the banking union, much has been made of how the relationship between the ECB and Bank of England develops. I can’t help wondering if another, far newer, City institution is at risk of being sidelined to Frankfurt’s gain.
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