BANK REFORM

… The bank governor is determined to prevent a Japan-style economic crisis in the UK.

The new Bank of England governor, Mark Carney, has launched a stinging attack on ‘socially useless’ bankers and has called for a ‘change of culture’ in the industry.

The former Golden-Sachs executive, who succeeded Lord King as governor of the Bank of England last month, hit out at self-obsessed bankers who are, he says, detached from reality.

The Canadian has also defended the decision to peg interest rates to unemployment – a move that looks set to see rates remaining at 0.5 per cent for at least another three years.

Mr Carney expressed ‘tremendous sympathy’ for savers who have ‘done the right thing’ but insisted drastic action was needed to ‘secure the recovery’ and prevent a Japanese-style economic crisis in Britain.

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This followed his announcement last week that the Monetary Policy Committee (MPC) will not raise rates from o.5 per cent until unemployment falls to 7 per cent or lower. Unemployment is currently running at 7.8 per cent and is not expected to reach the new threshold until the end of 2016.

Turning his fire on the banking industry, Mr Carney said:

… There has to be a change in the culture of these institutions.

He said that ‘finance can absolutely play a socially useful and economically useful function’, but added it must focus on ‘the real economy’. The Bank governor said banking is ‘socially useless’ when it becomes ‘disconnected’ from the economy and society and ‘only talks to itself’.

Mr Carney, who is also chairman of global banking watchdog the Financial Stability Board, added:

… A lot of what we are doing internationally is to strip out this type of behaviour.

The Canadian said the decision to peg interest rates to unemployment – a tactic known as ‘forward guidance’ by central banks – would boost the economy by ‘more than half a percentage point of GDP’ over the next three years.

Amid a fierce backlash from savers he insisted low rates were required to ensure the economy finally recovers from the biggest boom and bust in history.

‘The best way to get interest rates back to normal levels is to have a strong economy,’ he said. ‘We’re in the very early stages of a recovery from the weakest period on record.’

He said Japan made two mistakes after its recession in the early 1990s – failing to fix the banking system and pulling back from measures to stimulate the economy too quickly.

… As a consequence, almost a quarter of a century later, interest rates are still at rock bottom levels in Japan… We don’t want to make those mistakes here in the UK.

COMMENT

Mark Carney’s predecessor, Lord King, started a hard line on the need for banks to reform their cultural practices, by being useful contributors to society and by insisting that they strengthen their balance sheets so they no longer expose the taxpayer to excessive risk.

In some recesses of the banking sector, the appetite for running their operations on wafer-thin levels of capital remained undiminished by the worst financial crisis the world has ever seen.

Some in the City of London had hoped that Mr Carney would administer a snub to King by letting off bankers more lightly.

Given the governor’s role as chairman of the Financial Stability Board, and his personal championing of higher leverage ratios whilst at the Bank of Canada, that always seemed improbable – and so, thankfully, it has proved.

In his first public pronouncement on the subject Mr Carney made it crystal clear that he, no less than King, wants the banks to start serving the real economy instead of just themselves. He made a point of praising King’s work in improving bank balance sheets and of name-checking Andrew Bailey, who heads the Prudential Regulation Authority, the body that controversially forced Barclays and Nationwide to raise more capital.

The governor’s backing for the moves to make these two financial institutions formulate credible plans to increase their base capitals can longer be in question.

The great myth put about by the banking lobby is that higher levels of capital automatically constrain their ability to lend to households and firms and so hold back growth at a time when the economy is weak.

Whilst this seems to be a notion that has been swallowed wholesale by some in the Treasury and the Department of Business, it is not true.

Banks can improve their capital position by retaining earnings, scaling down bonuses and cutting back on other types of less socially useful business.

The new rules will, over the long-term, increase lending to the real economy, not harm it, and will give us safer and more secure banks, which can only be good for stability and growth.

Undoubtedly, there are plenty of questions over Mr Carney’s big idea of forward guidance, from the impact it will have on savers and on pensions, the risks to inflation and the distinct absence of a clear message due to the get-out clauses.

But on bank reform and conditions for capital holdings, Mr Carney should be applauded.