King accuses bankers of 'playing with fire'
Labour's poor regulatory system 'ignited the fuel' that led to the credit crisis
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Independent Minds
In an extraordinarily outspoken speech last night, the Governor of the Bank of England, Mervyn King, described the regulatory system framed by Gordon Brown in 1997 as "inadequate", claimed that wrongly incentivised bankers had been "playing with fire", and said that a central tenet of the Financial Services Authority's new approach was a "delusion".
Such failures had, suggested Mr King, meant that "we shall all be paying for the impact of this crisis on the public finances for a generation".
Close to £1 trillion of public money has been devoted to supporting the financial sector. Mr King called the sums "breathtaking" and "not sustainable in the medium term".
"Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we are now.
"It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place," he said.
The current "tripartite" system of regulation was framed by Gordon Brown when he became Chancellor in 1997, at which point banking supervision was transferred from the Bank to the FSA. The basic architecture of the system has been recently reaffirmed by the Chancellor, Alistair Darling, while the Conservatives have said that they will return oversight of banks to the Bank of England.
Despite the risk that the Bank itself is being politicised by this controversy, Mr King laid into the Brown-inspired "inadequately designed regulatory system", which, he said, "ignited the fuel" that led to the conflagration that has engulfed the nation. Mr King added that "the past two years have shown how dangerous it is to let bankers play with fire", adding that "it is a matter of the incentives they face", pouring fuel of his own on to the debate about bankers' pay and bonuses.
Mr King also expressed thinly veiled contempt for the proposals made in the Turner review and the Treasury's White Paper on banking. He said that the structure and regulation of banking in the UK still "need reform" and called for a "serious review of how the banking industry is structured and regulated". The Governor did not so much as pay lip service to the chairman of the FSA, Lord Turner's review, or the White Paper. Indeed, Mr King explicitly ridiculed the notion, central to the Turner review, that increasing capital adequacy requirements on banks would be sufficient to deal with the widely acknowledged "too important to fail" problem. It is, said Mr King, "worth a try", but Mr King was still scathing – "the belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion".
Mr King repeated his call for a separation of so-called "utility banking", covered by a state guarantee to depositors, from other forms of investment banking. Such a system prevailed for many decades in the US under the Glass-Steagall Act, finally abolished in the 1990s, and, less formally, in the UK before the Big Bang reforms of 1986. He said that resolution of the issue was inevitable – "the sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question".
Mr King said that there are now too few banks and that they yield too much market power, implying that they should be broken up. "By international standards UK banking is highly concentrated. There are four large UK banking groups. Of these four, two are largely in state ownership and their assets are a multiple of the assets of the next largest bank. As in the English premier league, getting into the top four will not be easy for those outside it."
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Comments
If RBS pay these extortionate bonuses to the fat cat greedy Senior Executives after being bailed by public funds largely due to gross neglect of the core business values and ethics,in taking unnecessary risks and forgetting the basics of sound and prudent banking, investments and lending, which was largely down to greed and incompetence.
No one in the bank deserves a bonus at the present time not at least until the bank is once again on a firm footing and even then bonuses should be modest; not these £millions proposed. And saying that, if RBS don't pay these 'carpetbaggers' or should we say mercenaries; someone else will. Where are the business ethics or morality in this kind of thinking? It sounds more like blackmail? If this is the kind of people they are, then show them the door. So many decent honest people in this country give more than they take in their professions and in their work places; not to mention the millions of voluntary workers and carers in the UK that give their time and service in their communities without expecting financial reward. Whilst it seems bankers think they should always be on the take. No matter where the money has come from, the state of the business or whether the money has been earned. It is about time they gave something back to their personal customers, their ordinary employees, their small share-holders and to the people of this country that saved them from oblivion only months ago. This greed culture has got to stop.
I have held my current account with RBS for at least 30 years and my father 30 years previous to this, back to the days of William & Deacons; with very little return for the thousands and thousands of pounds they have held in our accounts over the years.
It seems I and millions of other RBS customers have misplaced our loyalty; which seems thoroughly undeserved and it is about time we took our business elsewhere. I will certainly be seriously looking into transferring my current account once I investigate which banks and building societies are paying obnoxious undeserved bonuses and which are not. I will recommend my other family members and friends do the same.
I still believe Thatcher should be burnt as a witch, whilst there is still time.
I agree with King that Glass-Steagall needs to be re-invented in order to limit the value of the guarantees governments provide to the necessary utility bankers alone. By itself such a separation of investment banking and utility banking will not prevent bankers from losing money "big time": never underestimate the potential for bankers to re-invent the financial wheel and lose vast amounts of money every ten years or so (although they seem to be shortening the cycle).
Adair Turner's reason for not supporting Glass-Steagall, the sequel, was it didn't stop Japan from a lengthy recession and stagflation after the property bubble of the early 1980s. Yes this is true. Glass-Steagall, the sequel, is a necessary condition, but not sufficient i.e. good regulation is required as well as the correct business model.
The "tripartite" system is probably starting to work, with the FSA doing the micro management of the bankers by stress testing every deposit taker, it is such a pity it didn't do this five years ago. The Bank of England should run the macro management of the banking system, trying to spot the next mantrap the bankers are about to fall into and direct the FSA to start stress testing for it.
Yes, by accident, after the disaster the "tripartite" system, as it is currently working, together with a Glass-Steagall type banking separation of structures may just limit the damage next time round.
A pity the Tories are going to throw it away, then again, they are not called the stupid party for nothing. George Osborne proves he is a moron every single day.
Between neo-lib Labour, neo-lib Tory, and neo-lib Libdem, Britain has nowhere to go but straight off the cliff. None of those bums are going to split off proper banking from speculative wheeling-dealing and the insurance brokerages that insulate the gamblers from the consequences of their bad bets. None of those bums are going to trim down the mega-corporations to a size that can fail without taking everything else down with it, as indeed a capitalist enterprise should. "Too-big-to-fail" capitalism is no longer capitalism, it's socialism for the mega-rich, i.e. a higher form of fascism.
Stop boozing and come to your senses, Brits. Are you going to let these pinstriped bums lead you off the cliff? Do you want to end up being another Iceland? Or worse, Romania?
The other posters are right - this is the real disgrace, never mind the overspill of this culture which led to the MP's excesses. The roots of these crisis's lie way back in the deregulated 80's and 90's and the delusion that as opposed to mothers, teachers, engineers and virtually the whole working population the finance sector has a monopoly on "creating wealth". Well no it doesn't, it helps to create wealth but in the process appropriates vast amounts as "compensation" , "bonuses", note the language of the superior beings as they try to differentiate themselves from the common herd who have salaries, pay and the wage packet.
Never mind the politics of envy, David Cameron is shaping up to be Blair II, hated even more and unable to cope with civil unrest as he tries to impose public sector job and wage cuts whilst the bankers continue to appropriate vast amounts in the city. Never mind the dangers of inflation, living beyond our means etc. Never mind the rhetoric of "wage explosions", I suggest that if this lot continue in their merry way they risk real explosions with loss of life in our financial centres, people wont' stand by forever if they feel that their lives and that of their neighbors are facing unjust ruination whilst others enrich themselves.
When Thatcher used the phrase 'the enemy within' decades back it seemed a crude slander but today it seems apposite in relation to these bankers. When certain put themselves beyond the mores of a society & by their actions cause actual damage to that society then one approaches a state of criminality. We have reached that point & for the well-being of the country and its people it is essential that these social renegades be either reigned in or entirely removed from their bastions of power.
The majority of people who have a vote & who will use it, will probably blame Labour for all our ills & so cameron will be voted in. That he will only have perhaps 30% of the vote is irrelevant.
The power in this country is not held by the average person on the street, & we are likely to have more of the same for the next term of office by whoever is in parliment.
OK, I don't pretend to know the solution, but I do know it will take a revolution to change the way we are & the way we are going.
Mr. King is absolutely right, until root and branch reform of the banking sector takes place, banks will continue to behave in the same fashion. Instead of acting in the best interests of the country, the current Labour government are putting their own short-term political interests first,. The most blatant example of this was when the Lloyds/HBOS merger was put through after the suspension of consumer protection legislation.
These monster banks should be broken up with the 'utility' function being separated from the investment banking elements.
There will be a price to be paid for this which will not be popular but the end of "free" banking and credit cards must be a certainty which may mean consumers paying anything from £2-5 per month for having the facilities. The point is that the retail banking sector must be able to make a profit from its standalone retail operations. Besides which, there is nothing that is free anyway, we pay for it in one way or another already, let's put it upfront.
The recent experiences should encourage us to be prepared for this, it will be a relatively small price to pay to ensure that the retail banking system is properly policed and operates within strict capital reserve ratios, let the wide boys speculate as they will but, let us ensure that they can go bust without destroying the rest of the system.
For those who cite the Deregulation of the 80s as the root cause of the current problems, I would disagree because the main problem was the insane desire of Banks to become ever bigger, Goodwin "beat" Barclays to buy a Dutch Bank and in doing so, destroyed RBS, Barclays had a lucky escape. The real problem is "Too Big", "Too Much Ego", and not enough common sense and it just doesn't apply to banking, any one industry that comes to dominate the economy of any country, has the potential to destroy it too whether that is financial services, making motor cars or selling Gas and Oil, economic and industrial diversity is the answer particularly in the UK.