It’s virtually unheard for the governor of a central bank to launch an outspoken attack on the integrity and purpose of his country’s banking sector. But this is what Bank of England governor Mervyn King did last weekend.
In an interview with ex Telegraph editor Charles Moore, King, whose central bank will take back responsibility for prudential regulation from the FSA in 2012, slammed British banks for ripping off customers to fund bonuses, and being so short-termist that all they care about is “maximizing profits next week”.
King’s remarks were not welcomed by the City of London — where obliviousness to the true nature of Britain’s banks is a common malaise — and were immediately slammed as “populist” by economists including Tim Congdon, who criticised King for being the architect of the banking crisis.
Angela Knight of the British Bankers Association hit back with misleading claims that the UK banking sector has “reformed radically” since the crisis.
King has a clear agenda. His latest tirade about bankers’ immorality and greed will add power to the elbow of Sir John Vickers and the Independent Commission on Banking — due to report to the British government on reforming the banking sector this September.
Vickers is toying with radical reforms including a break-up of loyds Banking Group and the separation of “casino” activities like prop trading and derivatives trading from “utility” functions such as retail deposit-taking.
These sort of moves are highly unpopular in some financial quarters since they would signal the emasculation of ‘universal’ banks like HSBC, RBS and Barclays.
King’s remarks, welcomed in an FT editorial, will almost certainly boost the commission’s resolve to push for radical reforms along these lines. They also increase the chance that much higher capital ratios than those agreed by Basel (along Swiss lines), as called for by the governor and David Miles, a member of the Monetary Policy Committee, will see the light of day.
Since the banking crisis struck in September 2008, King and his BoE colleagues have repeatedly blamed UK banks for the crisis, and said that, so long as implicit government guarantees remain in place, they will remain a danger to the economy — and all other attempts at reform will be futile.
King and colleagues also want to prevent UK banks from continuing to “rent gouge” and treat customers, both corporate and retail, abysmally.
A former professor of economics at London School of Economics, King attacked current UK banking culture, suggesting traditional sectors such as manufacturing are much more “moral”. Here are some choice quotes from the interview:
“We allowed a [banking] system to build up which contained the seeds of its own destruction.”
“We’ve not yet solved the ‘too big to fail’ or, as I prefer to call it, the ‘too important to fail’ problem. The concept of being too important to fail should have no place in a market economy.”
“If it’s possible [for financial services firms] to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable [to the banks].”
King also said there is “too much weight put on the importance and value of takeovers” — a dig at former RBS chief executive Sir Fred Goodwin’s megalomania, perhaps. He said such deals create short-run profits but “it doesn’t make sense to destroy a company with a reputation”. In the past 25 years, said King, banks have increasingly “taken bets with other people’s money”.
“Financial services don’t like the word ‘casino’, but instruments were created and traded only within the financial community. It was a zero sum game. No one knew which ones were winners when the crisis hit. Everyone became a suspect. Hence, no one would provide liquidity to any of those institutions.”“If we had not stepped in for RBS and HBOS, all the British banks would have suffered runs. They didn’t understand the nature of the risks they were taking.”
“It is very unproductive to single out individuals. Bankers were given incentives to behave the way they did. That’s what needs to change. We must resolve this problem.”
To his credit, King did concede that he and the Bank of England made errors before the crisis, admitting, “I wish I’d spoken out more forcefully about the build-up of leverage.”
King has already expressed disinterest in Project Merlin — a recent deal between the UK government and the banks — and it was perhaps no surprise that this was not mentioned once in the Telegraph interview. However he did stand by earlier remarks that seemed to endorse the UK government’s deficit reduction program.
To me, it almost seems that something clicked in the governor’s brain last week.
This blog post was published in Qfinance on Monday 7 March 2010