My only question is will Sir Mervyn King now step forward and lead the charge to require banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details?
Given what he told the Treasury Select Committee he wants, requiring ultra transparency is the most direct and fastest way to achieve it as it brings market discipline to the banking system. Unlike politicians, markets are not influenced by lobbyists, but rather by the actual risk and performance of the banks.
Sir Mervyn King, Governor of the Bank of England, made a remarkable statement in front of the Treasury Select Committee this morning. I’ll include his whole quote below, but let me sum it up.
Andrew Large, a Labour MP on the committee, accused the Governor of being “relaxed” about the current economic situation, which provoked a surprisingly angry reaction from the Governor.
First, he said he is far from “complacent” .... Then he launched into a fierce attack on the banks, the weakness of politicians in the face of the forceful bank lobby, and the Labour Government....Politicians did back down in the face of the bank lobby when it came to regulating the banks.
However, that was only after these same politicians had been advised by their nation's financial regulators to adopt the Japanese model for handling a bank solvency led financial crisis.
The regulatory blessing of hiding losses on and off the banks' balance sheets gives the banks tremendous negotiating leverage that bankers are uniquely qualified to take advantage of.
Had the Swedish model for handling a bank solvency led financial crisis been adopted, politicians would not have backed down in the face of the bank lobby.
Sir Mervyn opened by claiming the banks should have been recapitalised far more than they were (in all it was close to £100bn). In the case of RBS, that would have probably meant full nationalisation.Readers know that between deposit guarantees and access to liquidity through a central bank banks can continue to operate indefinitely and therefore there is no reason for governments to ever recapitalize a bank.
Readers also know that banks are the safety valve between the excesses in the financial markets and the real economy. Banks perform this safety valve function by absorbing the losses on the excesses in the financial markets today and rebuilding their book capital through the retention of future earnings and equity issuance.
Finally, readers know that banks must be required to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details. With this disclosure, market participants can confirm that the banks have recognized all their losses and that the banks are not gambling on redemption in their efforts to rebuild their book capital.
Then he claimed Labour had been feeble in its attempts to ensure the banks lent to small businesses, something he claimed to have had concerns about from the start of the financial crisis.
Gathering a head of steam, he proceeded to turn his guns on the way banks are currently behaving – suggesting they are even trying to profit at taxpayers’ expense.Why exactly does he find the banks' behavior shocking?
The UK government adopted the Japanese model for handling a bank solvency lead financial crisis. Having made bank book capital a sacred number, the government then had to bailout the banks on terms that were favorable to the banks.
Having benefitted so much from the bailout at taxpayer expense, why should he be surprised that the banks expect to continue to profit at taxpayer expense?
He claimed they are proving an obstacle to the Chancellor’s efforts to establish a “credit easing” programme to help lending to small business.
The banks, he said, want to hand over to the taxpayer the dud loans that will make losses while keeping the profitable ones for themselves.This behavior is no different than what banks had been engaged in leading up to the financial crisis. Then, the banks simply put the dud loans into opaque, toxic structured finance securities.
Having slammed the self-interested banks, he turned his ire on Labour’s years in power and, seemingly, Alistair Darling. In Labour's years, he suggested, banks more or less set public policy. The government negotiated with them and then adopted their proposals, he claimed. In all, it was quite a remarkable tirade.Again, by adopting the Japanese model, the government choose to let banks set public policy.
Here’s the quote:
“I’ve consistently and publicly been dissatisfied with what has been done. I said to the previous government that the scale of the recapitalisation of the banks was inadequate and their actions in making sure banks lend to SMEs was also inadequate. I made that very clear.
“In terms of asking banks to put together pieces of paper that are claims on SME loans, I will tell you exactly what would happen. The pieces of paper given to us [taxpayers] would be the worst of the loans, not the good ones. And I’ll tell you why. Because in discussing with the present Government a scheme to lend to SMEs, the banks were unhappy about the idea of a scheme in which the Government would participate in all SME lending.
“Why? Because they didn’t want to share the fruits of the most profitable loans to small businesses. We’d [the taxpayer again] end up being left with the bad ones. That’s why we’ve [the Bank] been very clear on this with Government.
“I’m not relaxed about it at all. I’m the person who put forward proposals for how this might be done. They are not proposals that banks find in favour. I’m disappointed that the government you supported before [Labour] was unwilling to take on the banks on this issue.
“They negotiated with the banks, and if the banks didn’t like it, that was what came out. That doesn’t seem to be a very strong public policy. So, I’m far from relaxed or complacent, Mr Large. I am actually rather concerned about it. I want to see something that makes sense economically, not something which is just a gesture.
“Unless there’s an element that tries to prevent the banks picking and choosing which SME loans they share with Government, and which not, there is a risk of adverse selection and taxpayer gets a bad deal.”Sir Mervyn King's issues with the banks could be cured by abandoning the Japanese model and adopting the Swedish model for handling a bank solvency led financial crisis.
Requiring banks to recognize their losses and provide ultra transparency to prove it would dramatically change the financial system for the better.