Alistair Darling’s prescriptions on reforming financial markets must be the feeblest response he can get away with (if he can) on behalf of the City in response to the catastrophe which only 9 months ago came within an ace of destroying the British and much of the Western financial system and tipping the world into an economic slump the depth and length of which is still uncertain. The burning issues that needed attention are the systemic use and abuse of toxic credit derivatives, a bonus culture out of control and now returning in full spate, offshoring and the extensive use of tax havens for multi-billion tax avoidance, significantly higher reserve requirements and capital ratios, creditworthiness assessments by wholly independent credit-rating agencies, regulation of excessively large banks, the splitting of the casino investment arms from the traditional commercial banks to protect the latter, and the proper regulation of hedge funds and private equity. All of these crucial items were either ignored or cursorily referred to without specific regulatory requirements.

It’s not as though Alistair Darling’s Treasury is not aware of what’s wrong. Admissions like “irresponsible pay practices made banks take too much risk”, bank boardrooms “had little appreciation of what was going on inside their own businesses”, and “we need a change of culture in the banks and their boardrooms” show at least some understanding of how dysfunctional the financial system had become, but the response is limp. Just as the Butler Inquiry into the Iraq War concluded that Britain was taken to war under false pretences (an exceedingly serious charge), but nobody was responsible, so the Darling White Paper concludes equally irresponsibly that whilst the financial system was clearly badly malfunctioning, nothing very much should be done about it. And the Chancellor was pretty shameless in saying why: 1 million jobs in financial services, £25bn a year tax generated by the finance sector and (though this was not said) preserving the City of London as the most profitable finance centre in the world. As though the impact of this on the 95% rest of the economy – in an over-valued exchange rate, under-taxation of the City because of its tax haven status, and unleashing of a highly damaging bonus culture – didn’t matter and didn’t have to be weighed in the balance.
In terms of specifics, the White Paper is a string of disappointments, waffle after waffle. Capital ratios will have to be increased, but the crucial question is by how much and on that there is silence. Will it be by 5% which would be pathetic, or by 20% which is necessary, and will it be pure risk capital put up by shareholders or will it come from creditors who this crisis has shown get bailed out? After the regulatory collapse that led to this crisis, a Council for Financial Stability is proposed, chaired by the Chancellor and containing both FSA and Bank of England members, but how much difference will that make (rearranging deckchairs on the Titanic?) and will it have the power to enforce its recommendations?
On bonuses, the FSA as regulator will have to report annually on how banks are avoiding excessive risk-taking with their bonuses (a factor that was central to the crisis), but how exactly will risky bonuses be determined and what will the regulator do to counter them? Outsize banks will be required to hold higher capital reserves, but how high will that have to be to avoid collapse (and outsize bail-out) as a result of recklessness? It is also proposed that banks should have a pre-arranged plan to break themselves up easily if they were to collapse, but there are no details as to how this might work. And banks will be required too to pursue counter-cyclical lending policies and not over-extend themselves with loans during times of boom (all perfectly sensible), but what are the procedures entailed and how will they be enforced? It’s fudge after fudge.

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