As he departs, Sir Mervyn King cannot be allowed to get away with a myth he has been promoting for years – the notion that the Bank of England was somehow a lone voice of sanity in the pre-crisis years and that its warnings of impending disaster for the banking system fell on deaf ears.
The outgoing governor was at it again this week in his final appearance in front of the Treasury select committee. "Our own reports were full of warnings," he said, referring to the Bank's financial stability reports of the era.
It's been a familiar theme. In 2009 King compared the Bank, after New Labour had removed its powers (now restored) of supervision of individual banks, to a church whose congregation attends weddings and funerals but ignores the sermons in between.
But were those financial stability reports of the pre-crash years really so prescient? Do politicians re-read the texts today and reflect: "If only we'd listened"? Hardly. This is the first sentence of the report from April 2007: "The UK financial system remains highly resilient." Five months later came the run on Northern Rock. To be scrupulously fair, the same report noted the early rumbles in the US sub-prime mortgage market and pointed to the potential dangers of excess leverage and lax credit standards.
But it also said the operating environment for UK banks and global financial firms had been stable and predicted that "conditions are likely to remain favourable". The reports, then, were full of "on one hand, on the other hand" lines. Some parts read well today, but the overall tone was definitely not a declaration that banks should look to their core tier one capital ratios while they still had the chance.
Nor should we accept the idea that King was a humble vicar and the damn-fool Financial Services Authority had all the powers. Yes, the tripartite system was flawed and failed spectacularly. But he was still governor of a 300-year-old institution and the Bank still had a formal responsibility for financial stability.
In short, the chief criticism of the first half of King's reign stands: the Bank was blinded by its success in controlling inflation and missed the incoming missile. But let's not be too churlish. The real news at this week's select committee hearing was King's comments about bankers' lobbying. He took a parting shot at those who have rushed round to Downing Street to put "tremendous pressure" on politicians to meddle with decisions made by Bank supervisors.
King's grumble, you can be sure, flowed from experience. Bankers' instinct, even after the state injected billions to rescue their industry, was to attempt to dictate the terms of reform and quibble over every detail. They resisted the idea of separating retail banking operations from investment banks via a ringfence. They clung to their bonuses even as shareholders' dividends evaporated, profits collapsed and capital was short.
And Barclays' Bob Diamond even declared in January 2011 that the "period of remorse and apology" needs to be over. The Libor-rigging and PPI scandals that then exploded showed the remark to be disgracefully disingenuous. But that was the mind-set the Bank was up against. King's contempt for the special pleading was admirable.
He banged on relentlessly about the "too big to fail" problem, insisting that taxpayers would not be safe until it was tackled head-on. In the face of bankers' squeals, he made the critical point that forcing banks to hold more capital does not impede lending.
"It is insufficient capital that restricts lending," he repeated. He pushed the case for deep reform and encouraged others, such as the banking standards commission, to follow. We'll see how the actual reforms work out, but it was fair for King to claim in his Mansion House speech the other week that the UK has been "in the vanguard" in learning the lessons of the crisis. That, in part, is because he tried to break the bankers' spell over the politicians.
So King's warning about bankers' lobbying habits should be taken seriously. Mark Carney, his successor, is a former Goldman Sachs banker and the banks will inevitably want to see if he is a softer touch. Let us hope he is not.
No laughing matter
Eurasian Natural Resources Corporation's time on London's stock market is set to close (probably) via an oligarch take-out at a scandalously low price. If ordinary punters with pensions and savings in tracker funds had not lost money, the tale would have a funny side.
We could laugh at the naivety of the City authorities who apparently believed the Kazakh miner would clean up its governance just because it was listed in London. And we could ridicule the non-executive directors who took a well-paid gig to encourage the illusion and ended up damaging their reputations. Unfortunately, investors in tracker funds did lose. ENRC is a member of the FTSE 100 index so tracker funds have been obliged to own the stock all the way down – from about £10 at entry into the supposedly blue-chip index in March 2008 to 211p now.
What should be done to avoid a repeat? The UK Listing Authority, now part of the new Financial Conduct Authority, will unveil its thoughts on companies with controlling shareholders soon but the thrust already seems reasonably clear. Minority shareholders will receive more rights to select non-executives; and "relationship agreements" will have to be stronger if a company wants a so-called "premium listing" that allows access to the indices.
This sounds too feeble. It looks like an attempt to tweak safeguards that failed at ENRC and at Bumi, Nat Rothschild's unwanted gift to London from Indonesia. If the UKLA really wants to improve matters it should start making judgments about companies with controlling shareholders, or appoint a panel to do so.
Has a company demonstrated over time that its governance is up to scratch? If the answer is no, grant only a "standard" listing and tell the applicant to come back in, say, three years if it has evidence of improvement. Consenting adults would still be free to own the shares, but tracker funds would be spared the obligation.
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