Morning:
8°c
As a general rule of thumb, the more a politician leaks a speech in advance, the more disappointing the actual result will be when it is delivered.
The theory is that the Press, having jumped at the opportunity to be spoon-fed a few exclusive headlines, will not sustain their interest long enough to read and criticise the full thing when it is delivered. In this way, the shallowness of the ideas will go undetected.
Thus it is with yesterday's so-called White Paper on the future of banking regulation, unveiled with much fanfare by David Cameron and George Osborne. If the Tory faithful are disappointed with the Conservatives' response to the banking crisis as represented by this document — and many are — the uncommitted should be truly scared. If this is the best they can do on banking, then Lord help us when they have to sort out the whole economy.
Abolishing the Financial Services Authority is just plain stupid. The organisation is not a creature of Gordon Brown as they like to pretend, but is in fact an amalgam of the Securities and Investments Board and a variety of subsidiary regulators for different market sectors which was created by the Tories in 1986. What Brown did was to weld them into one, and add the banking team from the Bank of England and insurance from the Department of Trade and Industry for the very good reason that as big complex financial institutions covered all these areas, so too should the regulator. The Tories' headline plan to abolish the FSA shows simply that they do not understand the world in which they live.
There is a case for giving the Bank of England responsibility for individual banking supervision and looking after the system as a whole, but there is no case at all for giving it insurance as well. And it is worth remembering that when the Bank last regulated the whole banking industry, there were disasters every few years.
In 1973-75, we had the secondary banking crisis. In 1984, we had the collapse of Johnson Matthey Bank. At the end of that decade came the collapse of BCCI. In 1995, Barings collapsed. All these — and several others – happened entirely on the Bank's watch. In each case, inquires found its performance to be less than perfect — they are human after all.
That surely is the point. The FSA has screwed up to some extent but the division that did screw up was staffed by people who originally moved across from the Bank of England. It was the same team, albeit with personnel evolving with the passage of time, as the team that operated within the Bank.
It was similar with insurance, which took on the DTI employees. How much more sensible it would be to allow the FSA to build on that experience so it can learn from the mistakes, rather than tearing the whole thing up and starting again. Because if we do, it will take the new system another 10 years to bed down, and when the next crunch comes there will be no guarantee it will perform any better.
Meanwhile, as former monetary policy committee member Willem Buiter pointed out in yesterday's Financial Times, giving regulatory responsibility for banking to the Bank of England will probably mean that its success with the MPC is threatened.
History teaches us that an institution can do one or the other but not both. Why? Because the two conflict. What Bank will jack up interest rates for the good of the economy if it thinks such an action will bust half the banks it is supposed to be supervising? Unfortunately, the Tories don't seem to get that either.
Another jarring note is the idea that the Bank should also have responsibility for insurance, which is a completely different industry, and one indeed that has suffered mightily from being treated in recent years as if it were subject to the same pressures and temptations as the banks are.
As has been noted above, before the FSA, insurance was the responsibility of the DTI and, as will always happen, the results were mixed. It oversaw the collapse of Vehicle and General, and it failed to intervene in time at Equitable Life.
But it also had resounding successes — not least its authorisation of Equitas, which allowed Lloyd's of London to survive and reinvent itself in the mid-1990s. None of this ever had anything to do with the Bank of England.
My main worry though is that it is far too simplistic to say, as Cameron and Osborne did yesterday, that the banking crisis was a result of regulatory failure. That was part of it, but a much deeper cause is the tectonic shift of power from the US to China, and the massive global imbalances that have resulted.
Another is the way technology has propelled us into a world of virtual finance where the only limit is one of the imagination, which means our ability to innovate has far outrun our ability to control.
A third is the globalisation of markets so that the banking system is now much bigger than the countries that control it. The list goes on and on. Suffice it to say not one of the Tory proposals comes close to addressing any of it.
