The latest figures from the International Monetary Fund make for depressing reading especially if, like me, you’re a British taxpayer.
They confirm that Britain’s banks have been among the least responsible in the world and that, when the total cost of Brown’s bailout is taken as a proportion of GDP, our banks been the most expensive to bail out. Or perhaps it’s just that our government has been closer to our supremely reckless bankers than other governments were, and has been more willing to lavish funds on its former friends?
The upfront cost of the UK’s government-funded rescue package for banks — including Northern Rock, Bradford & Bingley, Lloyds, HBOS and RBS (along with banks like Barclays which have benefited from less visible government support) amounts to 19.8% of GDP — the highest percentage of any developed nation in the world (Canada is next highest at 8.8%; while the US is third at 6.3%).
That is an astonishing one-fifth of UK output and more than half the total UK tax take. If UK Financial Investments cannot coax the nationalised and part-nationalised banks back to health, which is by no means certain, this is going to be disastrous for our country’s future prosperity.
In terms of the ‘net expected cost’ of the bailout, Britain also rules the world. As a percentage of GDP the net expected cost is, according to the IMF, 5.2% of GDP in the UK. Canada is second in this particular hall of shame — at 3.5% — while in the US the figure is 3.2%.
Even Ireland, often characterised as having had particularly irresponsible banks, is well below these levels with an upfront commitment to bailing out the likes of Bank of Ireland, Allied Irish Banks and Anglo-Irish Bank equivalent to 5.3% of Irish GDP and a net expected cost that is 2.6% of GDP.
The figures can be found on pages 16-17 of the IMF Companion Paper—The State of Public Finances: Outlook and Medium-Term Policies, dated 6 March 2009.
Current and future generations of taxpayers will pay a heavy price for the bankers’ irresponsibility and the generous rescue package put together for Gordon Brown and Alistair Darling. Taxation will have to be increased, public services may have to be cut, the cost of government debt will soar, as probably will UK interest rates.
Given all this, we need to know what it was that made Britain’s banks supremely reckless (with the possible exception of those in Iceland, for which I cannot find equivalent figures)? Was there some sort of reverse iodine in the bankers’ tea? Or were the banks just poorly supervised by the politicians and regulators?
I suspect the flawed regulatory framework put in place by Gordon Brown after 1997 and his own assumption (influenced by libertarians Ayn Rand and Alan Greenspan) that one can trust bankers to behave honourably and responsibly if they’re left to operate in a deregulated environment, since they are supposedly answerable to shareholders, have a lot to do with it.
The “no touch” and “light touch” approaches taken by the FSA since its inception — under Sir Howard Davies, Sir Calum McCarthy, John Tiner and Hector Sants — has proved disastrous.
The FSA’s principals-based approach (likely to be junked by the regulator’s chairman Lord Turner) has clearly not worked.
In the catalogue of bizarre decisions made by the FSA since 2001, one of the most egregious was its decision to award Advanced IRB (Internal Ratings Based) status under Basel II to HBOS in January 2008 — even though the bank was widely known to have the most cavalier approach to risk of any UK bank, with the possible exception of Northern Rock.
Given what is known about the Edinburgh-based bank’s supremely reckless approach, particularly thanks to Paul Moore’s explosive evidence to the Treasury Select Committee in February 2009, it is bizarre that the FSA decided this was one of the minority of UK banks that should be allowed to police itself and do its own stress-testing!
Perhaps it is Sir Howard Davies, Sir Callum McCarthy, John Tiner, Hector Sants and other FSA bigwigs should also be having their pensions docked — not just Sir Fred Goodwin? It’s worth remembering that the blokish, tanned and Porsche-driving Tiner is an alumnus of the now defunct Arthur Andersen, perhaps the least responsible accountancy firm in the world.
Why did Gordon Brown turn a blind eye to supremely reckless bankers?
It is also worth pointing out that Gordon Brown, increasingly being recognised as lead cheerleader for supremely reckless bankers (he was after all the architect of the post-1997 “no touch” supervisory framework), will eventually be forced to resign over this too.
On Friday, speaking at the Scottish Labour Party’s conference in Dundee, Mr Brown claimed that the time had come for “an urgent clear-up and clearing out of our banking system.”
Well, if Brown insisted on a properly functioning regulatory system 12 years ago, and paid more attention to the Augean stables of British banking before now, he might just have saved the British taxpayer a portion of the £500 billion you have had to lavish on our banking basket-cases so far.
Net direct cost of financial sector support as percentage of GDP
UK 5.2%
Canada 3.5%
United States 3.2%
Greece 2.8%
Ireland 2.6%
Netherlands 2.6%
Austria 2.4%
Spain 2.3%
Sweden 2.2%
Belgium 2.1%
Germany 1.7%
Portugal 1.3%
Hungary 0.9%
France 0.8%
Italy 0.6%
Switzerland 0.4%
Russia 0.4%
Norway 0.3%
Australia 0.3%
Poland 0.3%
Japan 0.1%
Korea 0.1%
Indonesia 0.1%
Argentina 0%
Brazil 0%
China 0%
India 0%
Saudi Arabia 0%
Turkey 0%
Source: The State of Public Finances: Outlook and Medium-Term Policies, published by the IMF 6 March 2009