Behind the easy-going manner, Bank of England governor Mark Carney is angry. The object of his anger is Sir John Vickers, the mild-mannered former deputy governor who keeps telling the world that Carney has gone soft on the bankers.
In recent months, when he hasn’t been discussing the impact of the EU referendum, Carney has behaved as if he were a Plantagenet king, dispatching his lieutenants to crush a former friend turned critic. The most recent intervention was led by Martin Taylor, a Barclays chief in the 1990s who sits with Carney on the financial policy committee, the UK’s financial watchdog.
Taylor’s defence of the FPC was cleverly couched not only as a rebuke to those who believe that it is weak, but also to those who consider regulation too tight, positioning the watchdog as even-handed – tough on banking, without crushing the industry under a welter of heavy-handed rules.
Why must Vickers be intellectually assassinated? The answer is in the credit bubble that is growing by the week. The Bank is concerned that it will be undermined as chief regulator if critics can convince the public and parliament its policies have been watered down and rules that remain made so complex they can be gamed by the finance industry to a point where they are worthless in the event of a crash.
Carney and the FPC are right to be worried. Vickers and others paint a scary picture of an industry where the culture has changed little and the next financial crisis is just around the corner.
Not only did Vickers say bank lending should be capped at 25 times capital, only to be told the chancellor would tolerate 33 times, his plans for ringfencing (to keep a bank’s retail operations separate from casino-style investment banking) were watered down.
Vickers wanted the kind of simple ringfence an interested citizen might be able to understand. Instead, he got a complex web of capital ratios and inter-relationships that few but the geekiest bank experts can fathom.
Bank chiefs are playing their old tunes. HSBC boss Stuart Gulliver said last year he would both cut the bank’s riskiest assets and achieve double-digit returns. It showed he believes the pre-crash era of super-returns is close at hand now the regulator is subdued.
Such is the huge volume of capital swimming around the global financial system that investors have for some time been spreading their bets, and this is where Carney’s critics get really worried. Part of the reason Gulliver is under pressure to promise super-returns is that investors are diverting a large portion of their savings to sponsor a huge rise in shadow banking, which is the term for generally opaque lending by non-bank financial firms.
There are bigger returns to be made than even bank bosses promise in their more exuberant statements. Already car loans in the US are looking like they are the new sub-prime lending scandal.
Mortgage lending in the UK is heading the same way after reaching pre-crisis levels. Too often mortgages are sold to over-eager first-time buyers at astronomical income multiples. And that’s the high-street banks at work.
Carney, who is also chair of G20-sponsored global regulator the Financial Stability Board, says the bank is on the case. According to the FSB, a narrow definition of shadow banking shows it grew to $36 trillion, or 12% of financial system assets, in 2014. A wider aggregate figure for all shadow-banking activities, including pension funds and insurers who lend out their securities, hit $137tn, representing 40% of total financial system assets. Last month, Carney issued the FSB’s latest review and urged countries to pay attention to the risks. But there is little public data on the scale of the risks taken by shadow banks and very little regulation.
A report by the University of Leeds and the University of the Basque Country shows that business school economists from across Europe are worried. They believe the culture of banks has changed little since the crash and governments are still in thrall to their financial sectors as cash generators, ignoring the risks they pose to their economies and social structures.
More than 90% of the 50 experts polled for the EU-funded Financialisation, Economy, Society and Sustainable Development (FESSUD) research project said that the benefits of finance were either overestimated or highly overestimated. They said the excessive size of the finance sector and poor regulation were the causes of the last crash. More than 70% said the flawed economic theory that underpinned a belief in financial systems as self-correcting was another factor.
These economists are not from the Corbyn/Sanders wing of academia. Some advise finance firms and even sit on bank advisory boards. Nevertheless, they believe the financial services sector will continue to grow, providing investors with risky profits, while the benefits for Europe’s citizens are “limited and likely negative”.
Worse for Carney, the economists are especially concerned about shadow banking, saying that as banks are further regulated, shadow banking will grow with, at best, loose regulation.
Their views tell Carney he should lay off Vickers and intervene across the entire industry to limit damage from a financial crash. If shadow finance has the ability to add a further twist to the turmoil, it will be in setting off defaults and bankruptcies across businesses and households, while having only a fraction of the weakened checks and balances on the banks. It goes to show regulators need more bite and less bark.
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