Tuesday, November 22, 2011

BoE Financial Policy Committee member Robert Jenkins claims banks are 'lying' about cost of reform

A Philip Aldrick Telegraph article reports on Bank of England Financial Policy Committee member Robert Jenkins' observation about the banking lobby's deliberate dishonesty about the cost of reforms.
In some of the strongest words on self-interest in the financial industry to come out of the Bank, Robert Jenkins, an independent member of the Financial Policy Committee (FPC), said the banking lobby has been deliberately dishonest to suit its argument that tough new regulations will damage the economy. 
"The latest lobby tactic is to convince pundits, public and politicians that encouraging prudence too soon will hit the economy too hard," he said. "This is no longer amusing. This strategy is intellectually dishonest and potentially damaging. It is dishonest because it is untrue." 
Banks across the world have been pushing against reforms that will force them to have bigger capital buffers, to protect them against future losses, and hold more liquidity, to stop a run on the bank from causing its collapse. 
Banks would prefer these reforms to ultra transparency as these reforms preserve opacity into the banks' exposures and let the casino bank continue to operate.

This blog has already shown how requiring banks to disclose their current asset, liability and off-balance sheet exposure details on an on-going basis will subject them to market discipline.

The result of market discipline will be banks that hold much less risk and much higher levels of liquid assets and capital.
The Institute for International Finance, the leading global banking lobby group, has claimed that the harsher rules could result in millions fewer jobs being created across the world in the coming years as global growth progressed at a more sedate pace. 
Stressing that "my remarks are my own", Mr Jenkins characterised the banks as attempting to hold regulators hostage by claiming that only by starving the economy of credit can they be made safer. "If we do, it will be all your fault," is how Mr Jenkins summed up the industry's approach. 
"The truth is that banks can strengthen their balance sheet without harming the economy. They can do so by cutting bonuses, by curtailing intra-financial risk-taking and by raising term debt and equity," he said. "Thus a profession which should stand for integrity and prudence now supports a lobbying strategy that exploits misunderstanding and fear."...
As Mr. Jenkins knows, bank lobbyists will present the facts in the best light for their clients' interests.  Recent events would seem to play into the lobbyists' story line.

First, we have the fact that banks have very limited access to capital as investors are not going to invest in banks where they cannot assess the risk of the banks.

Without ultra transparency, banks are what Bank of England's Andy Haldane calls 'black boxes'.  With ultra transparency, investors have access to the current asset, liability and off-balance sheet exposure detail they need to assess risk and make a decision on the amount and pricing of their exposure.

Second, we have the fact that market participants, including regulators, are justifiably nervous about bank exposure to sovereign debt.  As a result, Eurozone banks are reducing their holdings of none host country sovereign debt.  As banks cut back their exposure, it reduces demand and drives up the cost of sovereign debt in both the primary and secondary markets.

Third, we have the fact that Eurozone regulators are calling for banks to meet a 9% Tier 1 capital ratio by next summer.  One way for banks to achieve this ratio is to reduce the size of their loan book.  The decline in loans potentially hurts the economy.

Mr Jenkins, who as an FPC member will help decide when to restrain the banks, added that "not all bankers agree with" the lobbyists' tactics. 
"They should distance themselves quickly," he said. "For in pursuing its short-sighted approach the banking lobby is unwittingly making the case for more intervention in an industry which refuses to reform."
As this blog has frequently observed, the only reform the industry really needs is to require ultra transparency.  Market discipline will force the banks to carry a much higher capital ratio and much less risk.

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