You thought the authorities in the UK have done something about the TBTF bank subsidy? LOL.
This is a nice passage from a House of Commons Banking Standards Committee hearing which consists of little more than all and sundry trying to avoid responsibility for actually doing anything about TBTF. To summarise…
Question 4505 consists of the chairman of the committee (Andrew Tyrie) asking Mervyn King if he has the powers to deal with TBTF.
Mervyn King answers by saying that TBTF is for the Prudential Regulation Authority to sort out “over the next five to ten years”. Hilarious – no sense of urgency then!!!
As Michael Meacher put it, “The pusillanimity of the new capital reserve requirements was accompanied by almost unbelievable procrastination.”
As for the idea that the PRA has the powers to do anything effective about TBTF, that’s nonsense. Disposing of TBTF requires a major change in the entire structure of banking of the sort advocated by Positive Money, Milton Friedman and others.
That’s why this Bloomberg article was entitled “The best way to save banking is to kill it”. That is, drastic and fundamental changes are needed.
The PRA simply does not have the powers to dispose of TBTF.
Next, Mervyn King suggests that separating retail from investment banking (as per the Vickers commission) is an important part of the solution. Well it’s not because letting large investment banks (like Lehmans) fail is highly problematic. Indeed, having proposed the retail / investment split as the main element in his solution to banking problems, Vickers did not have the guts to say whether he’d let a Lehmans fail.
And a second element in Mervyn King’s so called solution is “resolution”: that is a pre-planned and orderly closure of failing banks. We I’ll eat my hat if I’ve got this wrong, but the mere fact of closing down a bank in an orderly fashion does not alter the fact that a TBTF subsidy was in place prior to closure (if indeed such a subsidy was in place). “Resolution” is simply irrelevant to the TBTF question.
Here is some of the buck passing – I mean “text”.
Q4505 Chair: Thank you very much for coming before us this morning, Governor and Mr Bailey. We have today another hearing of the Banking Commission. First of all, it would be helpful to establish, Governor, whether you are confident that you have got the powers to do the job that you have been given. When you used to come before the Treasury Committee prior to 2010 you told us that that was certainly not the case, but that was prior to the two pieces of legislation, of which one is on the statute book and one is on its way. With that in mind, do you agree with Michael Cohrs that the elephant in the room is that banks are still too big to fail? Have you now got the tools that you need to deal with that?
Sir Mervyn King: I agree with Michael that banks are still too important to fail, or too big to fail. That is the single biggest challenge facing the new Prudential Regulation Authority. If I were to say what the objective is over the next five to 10 years for the PRA, it would be to ensure that, at the end of that period, we have genuinely solved the "too big to fail" problem.
For a long time, we have thought that there are three aspects to this. One is the need to restructure the banking system: to separate what one might call the utility aspects of banking from the investment banking and trading parts, and obviously the Vickers proposals for a ring fence go a long way towards that. The second is resolution: we have a domestic resolution regime but we still have to develop an international regime. The third is to have sufficient capital in banks, by which essentially I mean that the leverage of banks is not too high. On all three we have made significant progress and the Bank has largely the right powers, but not completely, as there are some aspects, particularly on leverage, where the Financial Policy Committee would like to have greater powers; where we feel that the original Vickers proposals on leverage were the right ones, the concession made on leverage was a mistake and it would be better to go back to the original Vickers proposals.
By and large, I think that we have got adequate powers, subject to those concerns. There is a lot of work to be done; on international resolution we should not believe that we are anywhere near close enough yet to having an international resolution regime. That will depend in practice not on getting legally-aligned regimes, which is not going to happen-certainly not across the Atlantic-but in having sufficiently close co-operation between supervisors that they have a common understanding of how, in practice, they will resolve a bank that is in trouble. There is still quite a long way to go, but we have made a very good start and I am very pleased that we have got significant progress in those three areas.
Q4506 Chair: But you have not put any bids in for any powers that you have not got but that you would like?
Sir Mervyn King: Not at this stage. Obviously, I have made the point about where we agreed with the original Vickers proposals, both on leverage and where the burden of responsibility lies for arguing that banks have sufficient primary loss absorbing capacity, and there are some things in that area, but, by and large, it is a start.
The unknown question is whether the powers that we have been given will, in fact, be adequate to get rid of the "too important to fail" problem. That is why I said to you before that my view is that it would be sensible to have a proper review, after four or five years, of not just the ring fence but a whole range of issues that I would put under the umbrella heading, "Has the United Kingdom solved the ‘too big to fail’ problem?". It would be a good idea to ask Sir John and his colleagues to sit again in four or five years’ time-perhaps on the fifth anniversary of the date when the legislation takes effect-to report back on whether what has happened in that five-year period means that he is now content with the measures in place, or whether we need to go further.
Q4507 Chair: To be clear about the time scale for this review, you are suggesting that it should be five years after the legislation takes effect, which would probably be in about a year’s time.