On April 11 2014, the chief economist of the Bank of England, Andrew Haldane, gave a chilling ten minutes talk at the INET meeting in Toronto, in a panel titled: Have we repaired financial regulation since lehman? (from 37:40 onward) In that talk Mr Haldane walked his audience through a series of pretty straightforward slides that showed that in terms of some crucial banking parameters nothing much had changed since the wild west days from before the crisis. The largest global banks, so-called GSIBs or Global Systemically Important Banks, had become bigger, more interconnected and more complex.
However, the one dimension on which real change had occurred, arguably the most important one, thus Haldane, was equity. And here it is rewarding to quote Mr Haldane in verbatim:
'From a leverage ratio (equity as a share of the total balance sheet) of an eye watering thirty two just before the crisis it has now dropped to just north of twenty. How comfortable should that make us feel? Well with a leverage ratio of 20 a five percent fall in assets on your balance sheet will make you end up in the gutter. How frequent does a fall of five percent occur? Well if history is any guide every twenty to twenty-five years. We are now five years after the crisis, so if we are lucky we wil have a repeat performance somewhere in the next tewenty years. Again, how comfortable should that make us feel...'
This morning the FT reported that this should make us extremely comfortable. For Mr Haldane's boss, Mark Carney, who doubles as chair of the Financial Stability Board (FSB) and as such is responsible for tackling the GSIBs as well as shadow banking (which makes him one of the most important power brokers in the world of banking regulation) has indicated to his flock that enough is enough.
The headline read: Bank of England draws line under bank bashing. The report paraphrased Mr Carney as stating that 'banks were close to meeting their long-term needs for capital'and that there would be no 'basle 4': 'Our objective has never been to raise capital without limit or raise it by stealth.' Banks were within sight of the right amount of capital to help them ride the next financial cycle with impunity.
As the FT prissily noticed, that would translate into an equity level 'set significantly lower than global regulators had predicted immediately after the financial crisis.' Not surprisingly, a bank executive deemed the softening up of the stance of the British regulator 'most welcome'. While a partner of Allen & Overy saw it as the end of bank bashing.
From a tax payers perspective, this new indication that the high tide of banking regulation after the largest crisis since the 1930s has been reached and that from here on the journey will again be downhill, is anything but good news and raises pressing question of the role of Mr Carney. After he gave his blessing as chairman of the FSB to shadow banking by christening it as market based finance (see here for that story), he is now drawing a line under what is arguably the most important battlefield for safe banking, the leverage ratio.
There is going to be no more ratcheting up of capital requirements if it is up to Mr Carney. Not bad for a former Godmanite gone undercover in banking regulation. I wonder what Mr Haldane makes of this. And I would love to hear him reclaim his right to speak his mind as he did in a wonderful series of papers before he was 'promoted' to the Monetary Policy Council. If five percent is not enough than it is not enough, no matter Mr Carneys assurance that it is.
Whatever happens, this is a crisis that has definitely gone to waste. Poor citizens.