It is NOT ‘spot on’ to imply that Labour were deregulating with one hand tied behind their back because that’s what the Tories / City wanted. Case in point:

“Lehman Brothers is a great company today that can both look backwards with pride and look forwards with hope. And in wishing Lehman Brothers the success it deserves for its future, let me thank you for the privilege of being here and formally declare this building open” – Gordon Brown opening Lehman’s European HQ, Canary Wharf April 2004.

Seriously, LibCon needs to get a bit less pro-Labour – and I say that as a member of the party.

They were warned!!

http://www.huffingtonpost.com/rob-johnson/jim-chanos-warned-brown-g_b_274527.html

The problem is not a lack of regulation – Labour introduced vast amounts of regulatory financial legislation. Have you read FSMA? Or the CA2006 for that matter? What Labour did was move from a values-based regulatory system to a rules-based one. It did this because it believed the old-boy network was in charge of the City and that wasn’t efficient – also that the Treasury was better placed to judge than the Bank of England.

There’s nothing inherently wrong with that (although I disagree with the idea that centrally-imposed rules are the best way of managing behaviour in most cases), but the idea that Labour ‘didn’t regulate banks’ or that the UK has or had an ‘unregulated banking sector’ is ignorant nonsense and really ought not to be repeated.

there are lots of bold ideas, and as it happens UK players like the BoE, FSA and the Independent Banking Commission are probably pushing for the most radical reforms of anywhere in the world

In contrast to the US, the striking feature of the UK’s debate so far has been the near-unanimity of UK regulators in pushing for radical changes in bank regulation and industry structure.

that’s from a very interesting post about the battle between UK regulators and the banking lobby, focusing particularly on a recent publication by Demos which the author claims is hack work for the banking lobby. imho a must-read.

some ideas are bold and simple. much higher equity requirements would help a great deal (see here) and if you want a really bold idea then look no further than Limited Purpose Banking, which would transform the financial sector almost beyond recognition. There are plenty of ideas out there about macro-prudential regulation etc.

The LSE’s Financial Markets Group is probably one of the best places to go looking for bold ideas, home to the radical Paul Woolley. Maybe Ed should go talk to them. In 2001 they wrote a report on Basel 2 that looks very prescient in retrospect.

hmm, looks like a screwed up a link. Here’s Paul Woolly’s “Centre for the Study of Capital Market Dysfunctionality”

http://www.lse.ac.uk/collections/paulWoolleyCentre/Default.htm

[incidentally, those interested in the subject of tax avoidance should read GE's strategies let it avoid tax altogether in today's NYT]

“Seriously, LibCon needs to get a bit less pro-Labour – and I say that as a member of the party.”

It’s only been a couple of days since Labour members on twitter were condemning us for publishing a post by a Lib Dem activist criticising Manchester Council! If you wanna send us something criticising Labour, you know where to send it…

Ideas? Pah! They have none. Like the shower on the government benches, Labour’s leadership is dominated by PPE types who learned a state-centred form of philosophy. Because of this, they cannot think ‘outside the box’. Their ability to think creatively and laterally is hampered by their lack of philosophical breadth and depth.

As for bold policy prescriptions, we have Lord Turner, chairman of the FSA, on: ” a wide-ranging review of global banking regulation”:
http://www.fsa.gov.uk/pubs/other/turner_review.pdf

But otherwise, there won’t be much action on this front before the final report, due in September, of the Banking Commission, chaired by Sir John Vickers, Warden of All Souls college Oxford, and previously the Drummond Professor of Political Economy at Oxford:
http://www.hm-treasury.gov.uk/press_11_10.htm

We have been promised an interim report by the Commission in a few week’s time, on 19 April.

If recent comments about banks and bankers by Mervyn King, governor of the Bank of England, are anything to go by, we can anticipate a lively debate.

“Mervyn King told MPs that ordinary people were not to blame for the pain ahead and that he was surprised there had not been more public fury. . . Mr King said the cost to ordinary people was one reason why the Bank would take a hard line with banks and let troubled lenders fail when regulation is transferred to it from the Financial Services Authority.” [2 March 2011]
http://www.independent.co.uk/news/business/news/king-says-living-standards-may-never-recover-from-the-crisis-2229570.html

As best as I can judge, bankers are claiming complete innocence for the events which lead to the international financial crisis while the coalition government has been blaming all our challenging fiscal troubles on the mess left by Gordon Brown and Ed Balls, his chief political ally and economic adviser.

News about the culpability of the banks and bankers disturbs that simple message about who is to blame so we can expect lots of political smoke to fudge any passing perceptions of the truth.

Btw recent events have much reminded me of personal experience in online debates 10 years ago when I was making the silly and even “insane” suggestion that it was not in Britain’s interest to join the Euro.

Seriously, LibCon needs to get a bit less pro-Labour – and I say that as a member of the party.

Not sure that criticism works on a post where I applaud them for admitting mistakes of the past while asking them to go further.

Ellie, you’re right they imply they were being held back. But that was the pervasive thinking at the time. They’ve now admitted that was a mistake. Isn’t that worth applauding?

Sunny,

It depends on whether this is a genuine mea culpa or political positioning for a new policy – there is no way Messrs Ball and Milliband could launch a policy of tighter banking regulation for example without admitting the past was a problem (regardless of whether you think it was lack of regulation or too much of the stuff that was the problem).

With Mr Balls, I can only see this as positioning I’m afraid – and I’m also afraid that if Labour are going to go down the tighter regulation route (unless they also try the simpler regulation route, which would be out of character with the micromanagement that the Treasury displays under all governments, and with the career history of the two senior Labour frontbench figures) then they may end up putting themselves in a no-win position on the economy.

Will Labour end the annual subsidy for the banking industry (currently at around £100bn a year!).

Sunny, I think you should be a bit more careful about how you phrase that. I think people could get the impression from how you’ve put it that a subsidy exists with an annual cost, such as a tax break. Also, you make it sound like it is a subsidy that could be “ended”, as one might decide to reverse a tax break.

This “subsidy” is an estimate of the value to the banks of being able to borrow money at a lower rate than they would with out an implicit state guarantee.

The cost to the taxpayer of that subsidy is the expected value of having to payout on that insurance policy, which is not an annual cost but something that happens whenever there is a crisis and the banks are bailed out, and may be small. As it happens, the cost of the bailout was relatively small in the recent financial crisis (which is a very different thing to saying the cost of the crisis to the taxpayer was small, but the “subsidy” relates to the eventual net cost of the bailout itself. The costs of a financial crisis to the economy and to public finances would be incurred even if there were not bailouts – possibly more so).

Could Labour “end” this subsidy. Yes, but not simply by withdrawing the implicit guarantee. No government could credibly commit to allowing banks like RBS, HBOS, Barclays etc. go under next time there is a crises. The only way to “end the subsidy” would be to completely restructure the banking system to end “too big to fail”, meaning either breaking up the bank or replacing them with LBP style mutual funds.

Of course higher equity would reduce risk.

But getting there from here….well, that means less lending than would otherwise be the case and/or higher retained profits.

Yet there are calls for them to lend more now and pay more tax now.

Well, it’s one or the other.

cjcjc

other options would include raising fresh capital, paying bankers less and not paying dividends until re-capitalised.

[but yes you are right there is an often ignored inconsistency between between calls for banks to lend more and demands for them to reduce leverage]

Hi – we’d like some equity please – sorry, though, no divvies.
Any takers?

Might be rather expensive capital…!

cjcjc

dividends paid after recapitalization, so equity investors who participate in recapitalization would receive dividends.

I’m not sure about this, but it need not even be the case that dividends would be small because retained earnings would then be spread over a larger shareholder base, because there would be an offsetting reduction in payments to non-equity sources of capital. .

Pretty lame to say central banks failed to regulate the banks properly when none of the three central banks we are referring to, Fed, ECB and BoE had responsibility for regulating the banks. Where they were to blame is allowing the money supply to fall dramatically throughout 2008 and turned an economic slowdown into a huge crisis. It is all just posturing to call for more regulation without specifying exactly what should be regulated. Folks on this site will blame deregulation but none of them can say what was deregulated that later led to the UK banking crisis? We need better regulation not just tighter or more regulation for the sake of regulating. The problems that led to the banking crisis arose in the repo of the shadow banking system. Do you think for one moment that Ed Milliband knows anything about what the shadow banking system? By definition the shadow banking system is difficult to regulate because it exists off balance sheet. How is he going to regulate it?

@14: “Well, it’s one or the other.”

But is it? Could it be that banking services in Britain are overly concentrated as compared with other affluent countries and that as a result, banking in Britain tends on trend to be more profitable on average as compared with other affluent countries? And there are many other reasons why banking could be unusually profitable:

- Mis-selling securities in markets with gullible potential clients where information asymmetries are rife:

“The Financial Services Authority has hit Barclays with a record 7.7 million pound fine for mis-selling two income investment products to more than 12,000 clients who lost money during the financial crisis.” [January 2011]
http://uk.reuters.com/article/idUKLNE70H03B20110118

- Insider dealing:

A City banker who amassed almost £600,000 through insider trading with his wife and a friend has been jailed for three years and four months.
http://www.bbc.co.uk/news/uk-england-london-12345373

- Undisclosed conflicts of interest:

“Goldman Sachs apparently failed to declare a potential conflict of interest which resulted in pushing up the cost of a £23.5billion bail-out of Lloyds Banking Group, City sources claimed last night. The allegation that the Wall Street bank may have put its own interests ahead of its British clients comes just a week after it was accused of fraud in the US.” [April 2010]
http://www.dailymail.co.uk/news/article-1268378/Goldman-Sachs-conflict-inflated-Lloyds-bail-costs.html

The most glaringly obvious conclusion is that self-regulation of financial services markets doesn’t work to the benefit of other actors in the economy.

Btw for those interested, two recent, heavyweight but readable books about financial markets:

The LSE report: The Future of Finance (LSE 2010)

For an assessment by three French economists:
Dewatripont, Rochet and Tirole: Balancing the Banks (Princeton UP, 2010)

The most glaringly obvious conclusion is that self-regulation of financial services markets doesn’t work to the benefit of other actors in the economy.

The UK financial sector hasn’t been self-regulating for years.

– there is no way Messrs Ball and Milliband could launch a policy of tighter banking regulation for example without admitting the past was a problem (

Which is what they’ve done above Watchman.

Luis – wrt ‘subsidy’ – first, its the description offered in the FT. They have more of an explanation there

Sunny,

I know they’ve done that – my point was it seems likely to be the first plank in putting in place a policy – and they will get it out of the way now (when people aren’t interested) rather than when they launch the policy, which is sensible politics.

Sunny,

you are beyond belief sometimes. actually, it’s easy to understand: you just didn’t read what I wrote. please re-read my explanation of the subsidy in comment 13, then have another look at the explanation you refer me to, from the FT. key quote:

The subsidy arises from the government guarantees that keep the banks in business – and this includes Barclays as well as the publicly owned NatWest or Lloyds TSB. The guarantees allow them to borrow more cheaply than would otherwise be possible …. the Bank of England’s estimates, the value of the implicit subsidy now stands at a staggering £100bn a year.

then think about why referring to an “annual subsidy for the banking industry (currently at around £100bn a year!)” is likely to give your readers a misleading picture of the situation. Try and understand the difference between the value to the banks of the implicit guarantee and what the subsidy costs us. One reason I suggested your phrase was misleading is because a natural reading of it suggest that we a giving the banks a subsidy of £100bn a year in the same way as, say, giving them a tax break that’s estimated to cost £100bn in forgone revenue. Then have another read of what I wrote about what it would take for Labour to “end” the subsidy.

(co-incidentally, there is another subsidy estimated at £100bn, the BoE Special Liquidity Fund. That is due to end in Jan 2012, and is not what the FT is talking about)

you know, I live in hope that one day I’m going to leave a comment like this, and you will respond with something like: “yes, I see that I have misunderstood / phrased something badly, I shall correct my beliefs / words. thanks you for informing me.” but I really think hell might freeze over first.

Labour (or any government) could do a hell of a lot with the financial services industry, but I imagine the most likely outcome is a mess of additional regulation that will prevent the last crisis ever happening again. (Not that it will do anything about the next one.)

I would like to see retail banking divorced from casino capitalism, fractional reserve lending prohibited and no government guarantees whatsoever beyond a slightly-increased £100K FSCS limit.

But we all know that won’t happen.

@24 – “you know… I really think hell might freeze over first.”

Sunny appears to be psychologically a Leninist…

Heres a tip for some of you …The politicians …are the Bankers representatives here on Earth …..