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The Project Merlin infighting backstory, and the collision to come

March 4th, 2011

By Richard Smith

If you’re inclined to believe them (confirmation bias alert) the latest London rumours about the infighting that accompanied Project Merlin certainly dispel any doubts about the Treasury’s bank-favouring attempt to meddle with the Independent Banking Commission:

The Government offered to emasculate the Independent Commission on Banking as it tried to strike a deal on bank bonuses a few weeks ago.

That Merlin spin is finally being decoded with some precision in the mainstream media:

The row emerged in the last few days of frenzied negotiations around Project Merlin early in the New Year. A key objective of Merlin from the perspective of the banks taking part was to normalise relations between them and the Government. Thus the impression created by both sides was that the main area of discussion was bonuses and lending to small businesses.

It has now emerged, however, that the chief reason the banks took part was to lift the threat that Vickers’s commission would recommend a major restructuring of the banking industry which would have the potential fundamentally to alter how they do business and where they make their money.

The banks involved – Barclays, HSBC, Lloyds, RBS and Santander – were particularly anxious to avoid High Street banking being separated from investment banking, or a similar requirement which would force them to choose between acting as an agent for clients wishing to gain access to the markets or as a principal dealing on their own account in those markets.

A sufficiently cynical commentator could read that straight out of the Merlin press release a couple of weeks ago; and, if you’ll excuse the chest thumping, I did:

The other bullet points I wanted to revisit are these two:

  • promoting a strong and proportionate regulatory system, securing international agreement where appropriate;
  • implementing and applying European and international rules to create a level playing field in both policy and practice whilst protecting and maintaining the particular strength of UK financial services, and without pre-judging the outcome of the Independent Commission on Banking (IBC).

Well, I interpret “strong and proportionate regulatory system” as “not breaking up any more UK banks”; and “implementing and applying European and international rules” as “just sticking to whatever comes out of Basel III and not doing anything more radical”. “International agreement” is pabulum: it just means “not frightening foreign banks away by regulating heavily”. Then “without pre-judging the outcome of the Independent Commission on Banking (IBC)”, which will indeed be considering more radical reforms, is just an attempt by the Treasury to pretend they didn’t just say what they just said.

These latest stories are just rumours (though the veteran Anthony Hilton is about as well-connected and reliable a gossip as one could find in the British financial press), but of course they do tend to validate the speculation at this blog about why Project Merlin turned out the way it did.

Gratifyingly, the story also validates an optimistic assessment of the fighting spirit of the IBC members. The Government was sent packing, despite a determined push:

…it backed off only when Sir John Vickers, chairman of the inquiry, and his entire committee, Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf threatened to resign.

Good stuff, chaps.

Upshot: in the red corner, we have the entire IBC, Bank of England Chairman Mervyn King (just try to imagine Bernanke saying this sort of thing), BoE Deputy Chairman Paul Tucker, BoE Director Andrew Haldane, and FSA Chairman Adair Turner all calling for radical moves in bank regulation. In the blue corner, we have George Osborne and some banks. The IBC reports in September, so unless the battle really flares up and goes public before then, there will be plenty more ferrets-in-a-sack action to come.

Jaded Americans should reflect: if the UK regulators actually do produce radical changes, and make them stick, and they work, that will be a living reproach both to reregulation so far (Dodd-Frank and Basel III), and to your current political and legislative processes. That’s a lot of ‘ifs’, but success would make it a little bit harder to sustain the bank-favouring line that has prevailed in the US. So you do have a dog in this one last fight, too (and incidentally I suspect Tim Geithner knows this; we’ll see what he gets up to next).

This blog post was first published on Naked Capitalism on March 2nd, 2011

Short URL: http://www.ianfraser.org/?p=3659

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