I DOUBT THERE are too many readers who will remember the 1981 hit song by Bucks Fizz titled “Making Your Mind Up” with which they won the Eurovision song contest. But both the melody and the lyrics flashed through my mind when I read recently that the US regulators – both the Federal Reserve and the Federal Deposit Insurance Corporation – have advised banks that their living wills, recovery and resolution plans should not include in their considerations access to the discount window.
If I have got this right, the lender of last resort is telling the banks that they are not allowed to assume last resort lending to be available to them should they find themselves in trouble. Ladies and Gentlemen, life jackets will only be issued to those who can swim …
The regulators have been perplexing the regulated with an ever-increasing slew of impositions which, if my reading of what I hear from some senior people across the banking sector is true, has many of them wondering who is now here for who’s benefit.
HSBC’s chairman, Douglas Flint, made his own views quite clear when coming out of the closet and challenging the authorities to look at the unholy mess they are creating in their attempts to control everything from the calculation of risk-weighted assets to the colour of the coffee cups. What leads them into believing that putting the engine of a Fiat 500 into a Ferrari 458 will give them a Ferrari 500 utterly escapes me.
Sure, taxpayers want to be protected from bank failures – especially of the kind that befell the system in 2008 – but they also want to benefit from the riches which a vibrant economy can generate when risks are taken, even big ones. The dangers are not in the risks themselves, but in misreporting what they actually are. The tighter the regulation, the harder lenders will try to squeeze the risks into the boxes available, thus helping to generate disingenuous reporting and in doing so certainly creating the opposite effect from the one intended.
The tighter the regulation, the harder lenders will try to squeeze the risks into the boxes available
WHEN THE REGULATORY clamp-down on banks and their practices began in 2008, like it or not we knew exactly what the objective was. Bankers’ contrition – whether sincere or only for the benefit of the cameras and microphones is a moot point – emboldened regulators who gradually began to fall victim to the old dictum that power corrupts and that absolute power corrupts absolutely.
What had begun as a joined-up attempt to put an exoskeleton on the banking system has, over the years, developed into a race to the bottom by competing regulatory authorities and even by departments and offices within the same regulator.
Among the general business community the cries are still going up that the banks won’t lend. When they did lend into a bubble which was allowed to develop because regulators and legislators alike were asleep at the wheel, they were castigated. Now, rather than enjoying the positive effects of an awake and alert regulator, it often seems as though crippling constraints are imposed in order to assure the guardians that they can safely and peacefully go back to sleep in the knowledge that nothing can go wrong while they’re having their nap. The problem would now seem to be with the autopilot and not with the compass.
Regulation has already pretty much killed the short-term funding market. Now the back-stop is being taken away too. The once flexible and endlessly adaptable money markets have been squeezed until their overall function can be controlled by the ticking of no more than half a dozen boxes and any situation which doesn’t fit neatly into one of the boxes is, most probably, regarded as wrong. Or so it appears to many of those affected.
ALL THE WHILE, macroprudential regulation is supposed to lift the system out of the morass in which it had found itself. Part of this is focused on the principal-agent problem which manifests itself in the form of moral hazard which, in turn, is supposed to be the result of the existence of a lender of last resort and of deposit insurance.
In 35-odd years in banking I have yet to find any institution which bases its lending policy on the presence of moral hazard, but someone out there appears to have convinced many others out there of its veracity. Am I or are you less cautious when lighting a fire simply because the house is insured?
Every national economy needs free and easy lending if it is to grow and prosper – free and easy, not irresponsible – and the cost for that is that all of us who are part of and beneficiaries of that economy need to appreciate that there might, if things go wrong, be a cost to the collective. It might not suit everybody’s thinking, but it is a fact of life.
There is no question that between 2000 and 2007 things got heavily out of hand and that for every force there is an equal and opposite force. Thus, an out-of-hand banking system has brought about an out-of-hand regulatory framework and an even more out-of-hand gang of individual regulators. Two blacks don’t make a white and as much as bankers needed reining in, the time has come to rein in the regulators.
Someone up there has to decide what society wants from the banks and then that very same someone has to make sure that a system is established which guarantees that, within a sensible and regulated framework, this can be achieved. Sterilising the banks and pushing lending into the shadows is not only a poor result, it is no result at all.
Maybe that is why I found myself humming “Making your mind up …”
