Duncan’s Economic Blog

Banking Reform: The Government’s Confused Line

Posted in Uncategorized by duncanseconomicblog on September 1, 2011

Banking reform and the timetable for implanting whatever the Vickers’ Independent Commission on Banking recommends are once again making the headlines.

The Government, according to the FT, are looking at delaying implantation until 2015.

Whilst most blog posts start from a strongly held view and marshal arguments to support that view, this one will be a little different. Because I am genuinely torn on this question and still making up my mind.

Whilst I have argued for a long-time that banks need serious reform, and whilst I thought the interim ICB report was, if anything, a bit weak I can also see the point that proponents of delay are making.

Andy Haldane is surely right to argue that financial stability policy needs to get ‘macro-prudential’ and ‘lean against the wind’. In boom times regulators should be acting as a brake on banking sector exuberance but in times such as these they should be encouraging more lending – something than is, in many ways at odds with calls for firewalls, separately capitalised institutions and higher capital ratios.

On the other hand – a banking crisis seems to be brewing in the Eurozone one which will no doubt impact UK banks.

In many ways my preferred answer is, the rather useless, ‘I wouldn’t start from here’.

I think the mandate of the ICB was seriously limited as it didn’t really deal with the crucial question of ensuring the banking sector was ‘fit for purpose’ in terms of providing credit to the real economy.

The government tried to handle this separately through the very weak Merlin deal.

My ideal banking reforms – a state investment bank, more regional banks, more business-focussed patient investors and lenders, more mutuals – where never really on the table given the narrow mandate that Vickers had to work with.

But I am certain of one thing – the government’s current line makes little economic sense.

A case can be made, on macro-prudential grounds, for delaying banking reform as the economy is currently to weak with deal it. But to make that case whilst simultaneously pressing ahead with a severe fiscal tightening is completely muddle headed.

If the economy is too weak to deal with modest banking reform how can it possibly be strong enough to cope with the scale of the cuts?

Advertisements

Earth calling the ECB

Posted in Uncategorized by duncanseconomicblog on September 1, 2011

In today’s FT we learn:

  • The IMF thinks that Eurozone banks may have far more severe losses on sovereign debt than they have reported.
  • Eurozone unemployment is rising but inflation is stable.
  • Portugal is passing even tougher austerity measures and the economy is expected to contract next year. Debt to GDP will rise to 106%.
  • In Italy the government is rapidly losing credibility and the economy is becoming even more unstuck.
  • Greece’s fourth largest bank has sought emergency liquidity support.

All of which begs the question – what on earth was the ECB doing raising interest rates this year???

(Having trouble with links – will add later)