Previously the top banks were ‘too big to fail’; now under Osborne’s new system unveiled today the top man at the Bank of England is too dominant to fail. But the omens aren’t good. Mervyn King was the man who didn’t wake up quickly enough to the risks of Northern Rock’s use of the wholesale markets for mortgage funding, refused help to ailing banks because of the dangers of ‘moral hazard’, and perhaps most significantly of all laid the foundations for the financial crash through overly low interest rates which precipitated the credit bubble and excessive leveraging.
Having now watched Osborne several times at the dispatch box in the House, one sees a Chancellor far too obsessed with scoring political points rather than thoroughness of economic or financial analysis. Winding up the FSA is a political hit against Gordon Brown’s distinctive regulatory reform in 1997, but it’s not the root of the problem. Shifting around the institutional furniture is rarely the solution, and concentrating power in the Bank of England, as Osborne now proposes, will itself open up plenty of new problems including the potential conflict between monetary and financial stability. Nor will it solve the following old problems either.
This so-called reform doesn’t deal with the actual causes of the financial crash that occurred. There were 4 in particular:
* colossal bonuses which drove recklessness,
* the use of fancy SIVs (structured investment vehicles) including sub-prime mortgages,
* the conflict of interest whereby credit-rating agencies and auditing companies were paid by the companies they were assessing,
* and above all the overly lax culture of light-touch regulation.
So what specific mechanisms is he putting in place to stop these, as opposed to shifting around institutional functions which is all he seems to be doing? The moral of this supposed programme of banking reform is surely that it doesn’t matter where the regulatory powers are allocated, but rather whether they’re robust enough, whether they’re enforced vigorously enough, and how deterrent the sanctions are. On that score Osborne’s menu looks pretty thin gruel.