FICC does NOT need a social licence

I WAS TAKEN this past week by the written exchange between UK Chancellor of the Exchequer George Osborne and Bank of England governor Mark Carney. In short, Osborne has a dream and he’s enlisted Carney to help him realise it.

To do that, the Bank has been told it can transcend the primary function of its independent Financial Policy Committee – anchoring financial stability in the UK – to help the government create sustainable and balanced growth by improving productivity, competition and innovation in financial services.

Osborne dream? “Five years from now UK financial services will be the best regulated in the world, with the highest standards of conduct; there will be more competition, more innovation and more choice for consumers; Britain will be leading the FinTech revolution; there will be more high-quality jobs in finance across the UK; the City of London will remain the world’s leading international financial market; and the UK will remain a highly attractive location for domiciling internationally active financial institutions.”

Aaah … it’s good to dream. Osborne’s wish list is a bit fanciful, mind you, and tinged with idealism. I note that there’s nothing in there about UK financial services being the most profitable in the world. Or about that punitive and vindictive tax on banks. Or about the ill thought-out and potentially dangerous senior managers’ regime the PRA set out earlier this year. Or ditching hard compensation caps – all of which undermine London’s global standing.

Here’s one for you: what does “best regulated” mean? Does it mean most stiflingly regulated? Or is it the opposite: the most liberally regulated?

If the basis of current regulatory thinking is neutralising systemic risk in the banking sector by forcing banks among other things to hold eye-watering amounts of capital; banning outright certain practices; or in effect banning products you don’t understand by making them uneconomic, the utility banking model you end up with isn’t at all guaranteed to push creativity to the fore. Innovation and utility don’t make for the most interesting of bedfellows.

Regulating the shadow banking sector, which is where risk and risk-taking are being forced, is only now beginning to come into view and it’s far from clear – given the sheer diversity of activities that fall under its long shadow – how regulation beyond core banking will turn out.

In his letter, Carney told Osborne that over the next year the FPC will “consider potential systemic risks posed by: the investment activities of open-ended investment funds and hedge funds; securities financing transactions; the non-traditional, non-insurance and investment activities of insurance companies; and derivative transactions”.

Osborne’s wish list is a bit fanciful, and tinged with idealism

I CAN’T WAIT for the findings of the “Building Real Markets for the Good of the People” paper the Bank published in June, which will be unveiled on November 11 at an Open Forum (which Carney referenced in his letter).

The title of the paper is depressing. I’m tired of the clinical obsession policymakers and regulators have with this cartoon-like ”finance for the people” Communist manifesto “we’re all in it together” approach. I’m tired of the “reversing the tide of ethical drift” line; this “effective markets with a social licence contributing to prosperity” sloganising.

I don’t understand what “effective markets with a social licence” means. Markets do NOT need to regain their social licence, as the BoE suggests. Markets, in and of themselves, don’t have a social purpose per se; they’re institutional channels to secure a means to an end. They don’t exist for the social good, and we shouldn’t try and imbue them with character or personality.

The focus of Carney’s Open Forum is FICC. FICC is not a fluffy Disney cartoon animal. So when I read that his Forum is intended to bring together “all stakeholders” in FICC markets and that includes wider society as well as policymakers, financial market participants and users, academics and the media, I despair. Wider society – whoever that is – is NOT a FICC stakeholder.

WHY CAN’T THE focus be on just setting the right tone for and ensuring an adequate body of regulation to ensure transparent and well-priced risk transfer with proper protections for taxpayers, businesses and consumers and proper deterrents for morons hell-bent on breaking the law? It’d be discourteous of me to say “to hell with society” in the context of institutional fixed-income trading, but you get my drift …

I will be fascinated to listen to the discussions at the Open Forum in three key areas, which Carney referenced in his letter to Osborne:

1. Where regulations might overlap or “conflict” and “whether in aggregate they have unintended undesirable effects”. (OMG: how long have you got?)
2. Where the BoE has got on its “priority for ensuring diverse and resilient sources of market-based finance [that] can contribute both to the resilience of the supply of funding to the real economy and promote finance for productive investment”.
   “Capital markets are an increasingly important source of financing for the UK corporate sector and beyond, and globally almost all net finance growth since the crisis has been in market-based finance. A broad agenda encompassing non-banks is necessary to ensure that any potential systemic risks from market-based finance are identified and also that risks do not migrate from one part of the financial system to another,” Carney wrote.
3. Where the FPC has got to in its review of “the drivers and potential risks associated with reduced liquidity in many core markets”. The Committee plans to discuss in September the report on market liquidity it commissioned in March.

It appears Carney likes volatility: “reduced liquidity has contributed to some sharp intraday price movements in certain markets,” he wrote. “Greater volatility does not itself threaten financial stability, and to the extent it reflects the introduction of prudential requirements on market-making intermediaries, and more accurate pricing of liquidity, it is associated with a welcome increase in the resilience of the core of the financial system.”

Hmmm. Not so sure about that one, Guvna.