Robert Jenkins: "banks have bamboozled government" with false tradeoffs

Former Bank of England Financial Policy Committee member Robert Jenkins said that "banks have bamboozled government" with false tradeoffs.

As reported by Bloomberg,

banks have wrongly convinced government that measures to improve the safety of the financial system will curb growth. 

“I fear that the banks have bamboozled government into believing that society must choose between safety and growth, between safer banks and bank shareholder value, and between a safer financial framework and a competitive City of London,” Jenkins said in an interview. “These are all false choices.”

Regular readers know that the best example of where the banks wrongly convinced government is the need to protect bank book capital levels including the use of taxpayer bailouts to recapitalize the banks.

Bankers argued that if they had to absorb losses on the excess debt in the financial system they would not be able to make new loans to support the economy.  As shown by the US during the Great Depression, Sweden during the 1990s and Iceland with the current financial crisis, this tradeoff does not exist.

The banks recognizing the losses upfront on the excess debt in the financial system protected the real economy and set the stage for growth in the real economy.  This growth was supported by loans originated by the very banks that had taken the losses.

How was this possible?

Regulators recognized that because of the combination of deposit insurance and access to central bank funding the banks could continue to operate even with low or negative book capital levels.  While operating, the banks generated earnings that could be used to recapitalize the banks over several years.

Asked what surprised him the most while at the Bank of England,

 Jenkins said what surprised him most during his time on the panel was the absence of a “banker-statesman” among the current crop of British bank chief executives. 

“Name one who has acknowledged the industry’s failings, embraced the need for reform and then got out and worked with wisdom, humility, selflessness and objectivity to structure a sound, stable and fair financial system,” he said. “Most have fought the regulatory agenda. None has got out in front of it -- much less set it. Society deserves better of the financial leaders who claim to be serving society.”

The absence of a banker-statesman is not surprising.  It is entirely consistent with an industry that has compensated its members for developing opaque, high margin products.

If you want a banker-statesman, you have to require the banks to provide transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.  With this level of disclosure, sunshine can act as the best disinfectant.