Support for super-SIB is lacking in substance

'Regulation has become a political football where what matters is being seen to do something about vote-winners like the pensions mis- selling scandal, rather than putting in place a more efficient and equitable system of City supervision'
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The Independent Online
Between writing a hard-hitting criticism of the Government's proposed changes to City regulation and actually making public his thoughts yesterday, Professor Charles Goodhart picked up the phone from Gordon Brown and accepted a place on the Bank of England's new monetary policy committee. He should be applauded for not letting political patronage get in the way of telling it how it is.

Not that the reservations he and his academic chums express about the planned super-SIB will make a blind bit of difference. Regulation has become a political football where what matters is being seen to do something about vote-winners like the pensions mis-selling scandal, rather than putting in place a more efficient and equitable system of City supervision. What he has to say bears some scrutiny, but it won't receive the credit it deserves round at the Treasury .

The arguments for a single, all-encompassing regulator are superficially appealing, but scratch the surface and there is little substance. Organisational neatness is no substitute for effective regulation and is certainly unlikely on its own to create it. There is no reason to believe that a single regulator will have any clearer understanding of its objectives than do the present legion of different regulators.

Even more of a concern is the danger that distinctions that must be made, such as between the wholesale and retail markets, will be fudged and confused. The enforcement mentality that is appropriate to a watchdog tasked with guarding small private investors would be wholly inappropriate to the supervisor of wholesale practitioners for whom the ultimate sanction is to up sticks and head off to a less onerous market.

There are plenty of other reasons to believe the Government has jumped feet first into a morass of complexity without fully thinking through the consequences. The reputation of a single monolithic regulator could be irreparably damaged by a couple of high profile failures, while management faces a real prospect of becoming dangerously overstretched. Howard Davis faces a very great challenge in reconciling these differing needs and objectives under one roof.

Abbey is wise to avoid NatWest's problems

At last, a businessman prepared to kick against the fashion for more and more cost cutting consolidation in industry and finance. Or is he? Peter Birch, chief executive of Abbey National, is reported in a Sunday newspaper as being alone on the Abbey National board in supporting a merger with National Westminster Bank. He then went on to insist that the board was unanimous in rejecting the idea, and indeed eloquently puts the case against ever even considering it.

But just in case he's still in two minds about the matter (and the stock market certainly believes he might be), here's some humble advice to him and anyone else still tempted by the mega-merger strategy. Though such mergers are capable of sometimes delivering significant value to shareholders, they are also nearly always against most other interests. All kinds of weird and wonderful theories and synergies are generally wheeled out to help justify deals of this kind, but generally speaking the bottom line benefit is cost cutting and little else.

There's nothing wrong with this purpose as such, for if professionally executed, cost cutting helps improve competitiveness, as well as yielding a big one off gain for shareholders. Whether through merger or on their own, all banks will be forced to take an axe to costs over the years ahead. Furthermore, banking has become a business so open to new competition and new entrants that it is hard to argue from a public policy perspective that this is a merger that should be blocked on competition grounds.

But often the pain of such mergers is scarcely worth the gain and nearly always they are defensive in nature. They are about propping up and defending market share, rather than carving out new markets and opportunities; they are about managements which have run out of ideas and vitality, desperately casting around for ways to satisfy the City's insatiable appetite for change and value; they are about empire building and bonuses and more often than not, they are about crunching the customer, at least in intention even if in practice this purpose too usually proves a fruitless one.

There is no earthly reason why Abbey National should be considering such a cynical strategy. Since flotation it has done spectacularly well, for its shareholders and everyone else with an interest in its welfare. It will be hard to maintain that rate of progress but shareholders can still look forward to good, above average growth. National Westminster Bank, by contrast, is seen to be a company in some difficulty, a medium-sized player in a number of different and highly competitive markets. Probably it does need to do something, but Abbey would be well advised not to get mixed up in somebody else's problems.

The euro traders that didn't bark

For Sherlock Holmes, the most significant clue was the dog that didn't bark in the night. One of the oddities about the past two weeks' drama over the single currency has been the absence of any dramatic reaction in the bond and currency markets to developments in France and Germany. It is the traders in the financial markets, often characterised on the Continent as nasty Anglo-Saxon speculators, who have not been barking.

Why not? Why has there been virtually no market reaction to the most serious threat so far that monetary union will not go ahead as planned? Why are the speculators not out in strength, generating turmoil, trouncing the euro and driving currencies and bonds everywhich way? And why were they so sanguine about the new warning from the Bank of International Settlements that EMU could wipe 10 per cent off forex dealings?

The great detective provides the answer. If the dog has not barked, there is a reason for it. The solution to the euro mystery lies in the fact that fundamentally there has been nothing new to react to.

For as far as the markets are concerned, the euro is literally history. The kind of convergence in bond markets and dampening of currency volatility that has taken place since 1993 is based on genuine economic convergence and genuine policy commitments. The similarities between the core EU economies are now greater than their differences. The commitment of their governments to meeting the Maastricht criteria because this is the sensible policy has not wavered.

The gap between Theo Waigel and the new socialist Finance Minister in France, Dominique Strauss-Kahn, over how strictly to apply rules for budget deficits distracts attention from the fact that both believe in running prudent budgets. Italy's failure to make the fiscal grade on time does not mean that the Italian government has shrugged its shoulders in true Latin style and given up the effort. It will carry on struggling. Now if and when that changes, then the dogs really will begin to bark and the speculators will move in for the kill. But for the time being there is no underlying reason for a big correction.