CONSIDER THE FOLLOWING. Stream 1: Monetary policy actions that achieve the square root of zero, which deprive savers and pensioners of income, have no discernible impact on companies’ preparedness to borrow in order to invest in the real economy, on banks preparedness to lend or for that matter on consumers’ preparedness to engage in conspicuous consumption and which consequently conspire to kill off growth drivers.
Actions that have arrested investment decisions, distorted (destroyed?) the rate and maturity structure in financial markets (investors paying for fixed-income exposure … come on, really?) and increased systemic risk because they have created perverse incentives to invest in risky assets. Actions in other words that have encouraged narrow speculative instincts funded by access to dirt-cheap funding. And actions that trash the economic basis on which banking as a business is conducted.
Deutsche Bank CEO John Cryan was the latest in a long line of industry heavyweights naysaying central bank actions, commenting this past week that the ECB is doing more harm than good and Mario Draghi should ditch bond-buying and change tack on interest-rate policy. In the US, let’s see what emerges from Jackson Hole, but eight of the regional Fed banks have already been calling for discount-rate hikes.
Then we get to Stream 2: Regulatory ideas and actions that have burdened the banking, insurance and investment sectors with crushing complexity and crushing costs and which have failed to tame systemic risk tendencies or too big to fail. Actions that have created a series of let’s call them unintended consequences (bond market illiquidity to name but one) and which have transformed banks into capital-heavy compliance-driven utilitarian factories poorly incentivised to serve the real economy.
On EU regulation, you’ve been hearing about them for years, so sorry for trotting them all out again, but think about implementation headaches for the likes of EMIR for OTC derivatives, central counterparties and trade repositories; MAR, MAD II and CSMAD for market abuse; CRR/CRD IV for capital and governance (and including ABS risk-retention); BRRD for resolution and bail-in; PSD for payments; Solvency II for insurance; AIFMD for alternative funds; and of course the MiFID 2/MiFIR juggernaut. The list is far from complete; but just look at the sheer number of topics and policy areas covered by EBA, ESMA and EIOPA. It’s staggering.
Then factor in Basel – FRTB and Basel IV for starters. This year, the Basel Committee on Banking Supervision has been out with updates on everything from Pillar 3 disclosures, NSFR, securitisation, and capital arbitrage to interest-rate risk standards and risk-weighted assets in the banking book, to NPLs and forbearance, leverage ratios, operational risk capital, market risk capital requirements and anti-money laundering and countering terrorist financing. Dodd-Frank covers a lot of the same ground in the US, while at the level of the G20, the FSB has eight or so policy streams whose progress gets continuously pushed down through the hierarchies.
SO WHAT’S THE POINT to all of the above? Well, it’s way too much. And equally to the point, regulatory and monetary actions have lacked cohesion at the individual jurisdiction level, at the regional level and at the global level. The two streams have evolved in splendid isolation of each other because of inverse motivations.
The point is that despite the reality of a banking sector with much better levels of capital in terms of the dollar quantum sitting on the books of the world’s biggest banks, no-one has any faith – really – that the world is a safer place from the perspective of systemic risk, that we won’t once again succumb to vicious transmission effects or that we are in any way immune from another financial crisis, or that Additional Tier One hybrid capital instruments are a one-way ticket to taxpayer nirvana.
EVEN THOUGH we may end up with lower rates for longer, it’s easier to argue that the monetary element to the left-hand right-hand dysfunction has a more cyclical orientation. We now need the incipient roll-back on the regulatory side to accelerate to keep pace with monetary normalisation.
My sense is it’s much more widely accepted now that politically-inspired backward-looking efforts to fix the cause of the last financial crisis have failed to lead us to an era of banking or economic enlightenment.
The current crop of regulatory initiatives is far from being fully-installed. Just as Basel IV, say, is fast taking over the agenda even before Basel III has fully taken effect and there continues to be constant tweaking, subtle additions, updates and changes right across the regulatory agenda, I say the direction of travel towards potential banking and economic entropy needs to change now and the role of banks as key agents of capital transfer re-asserted for the good of the broader economy.
That can only happen if they’re freed from the shackles of over-regulation that serve little purpose in the real world. We need to imbue our economic agents with the right tools to support growth. Client-related risk and the right to be adequately compensated for it has to be a key part of that toolkit. Someone has to fund growth; it isn’t going to come free.
Net-net, the monetary-regulatory machine has to move in lockstep. Otherwise we will forever be stuck with the economic equivalent of the irresistible force paradox: unstoppable monetary force meeting immovable regulatory object. That, by definition, will lead us exactly … nowhere.
