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Wednesday, 21 October 2009

Brown pitches for retirement job at the IMF?

Mr Brown has rejected the Governor of the Bank of England's view that banks should be separated into investment banking and commercial bank, telling MPs that "the difference between having a retail and investment bank is not the cause of the problem."

Actually that wasn't what Mervyn King was proposing, but in any event the Prime Minister went on to say that "the cause of the problem is that banks have been insufficiently regulated at a global level."

Excuse me, it would be cheap shot to quote the many times that Brown argued against more bank regulation as Chancellor of the Exchequer, so I will be only slightly cheap and quote just one, but it is a good one:

“Last year we set out radical proposals for changing the way we regulate: minimising the administrative burdens of regulation; and ensuring that the realities of regulation, as you experience them on the ground, are transformed -- by moving away from the old blanket approach, of 100 per cent form-filling and 100 per cent inspection that is inefficient and wasteful of your time, to a new approach based on risk… And I believe, too, we should consider how we can continue to extend our risk-based approach, applying the concept of risk not just to the enforcement of regulation, but also to the design and indeed to the decision as to whether to regulate at all… And we will take the fight on deregulation to Europe.” - Brown speech to the CBI, 5 June 2006

Now the moral of the tale, is that if you are going to monitor, control, regulate or guarantee the performance of anything, whether it is a banking system, a complicated piece of machinery or anything else that is volatile and potentially unpredictable. you want to keep what you are controlling as simple as possible. That way there are fewer opportunities for errors, omissions, knock-on effects or systemic failures. Brown, who is just a control freak with little experience of the real world and no sense of operating a reasonable system within a budget (witness the budget deficit) goes for the unwieldy, take control of everything option rather than opting for the simple choice of ring-fencing the activities that can be regulated and guaranteed by the state.

If UK financial institutions want to make leveraged trades in commodities, write side bets on third party creditworthiness (CDS), or shuffle assets off their balance sheet in ways that may come back to bite them, well good luck to them and their shareholders. But I don't want to underpin their funding with tax payer backed deposit insurance. I have no issues with financial holding groups that own banks, provided that the subsidiary bank is, and remains, well capitalised and it is not allowed to play in the same games as the rest of the group.

I don't care whether the chairmen of Barclays or RBS say this makes them uncompetitive with other investment banks. It shouldn't because real investment banks like Goldman and most of the Wall St investment banking firms don't need retail deposits to survive. But I do care if a UK bank's dabbling in things it doesn't understand ends up requiring vast injections from the tax payer or freezes up commercial lending through a shortage of risk capital.

So what is Brown up to? Why is he now in favour of strong global regulation, not for the first time because he was saying the same thing alongside Angela Merkel earlier this year? A politician is unlikely to be invited to head the BIS where most of the bank regulations are formulated, so we can only assume that Brown has what is left of his one remaining eye on a cushy post-election number at the IMF.


Steven_L said...

Let's home they just sit him in a room with a team of researchers, publish his nonsense on their website from time to time and generally not take any notice of him then.

Cardinal Richelieu's mole said...

The IMF surely has care for its own reputation?

Brown is unemployable given how badly he has performed in his last two jobs.

engineer said...

The classic IMF response to a country in fiscal crisis is to enforce a breakup of it's banks. Go for it Brown, what price integrity!.

Simon Johnson, ex IMF chief economist, writes eloquently on this very point

Demetrius said...

Because we never will get strong global regulation, this is theocratic fantasy. Any political entity needs to sort out its own shop according to its own needs fast. The trouble is that the government has not realised what has happened and can happen again unless things are sorted soon.

Alex said...

"Because we never will get strong global regulation, this is theocratic fantasy."

Any "global" regulation that gets buy-in from the US, EU, Japan and Switzerland is effectively global because that is where all the big international banks are headquartered.

The IMF has long pushed for greater control of the banking system, or rather for a greater role in the policy setting for banks which is essentially run by the BIS, because without it it has a hard time not performing the rest of its roles, so if you look back through history you will often see sniping remarks from the IMF on bank supervision.

Bill Bell said...

There are some very big banks in China these days, look at those balance sheets...

Oh wait, you can't because they don't disclose anything.

Global regulation is very possible because most countries recognise they can't afford another crisis like the one we just had. I don't think some people realise just how close to the edge we were.

Because you can't domicile yourself as 'international' (other than by buying a country) and because banks generally, despite what they might tell people, derive strength from their country of domicile, it is likely governments will come to some kind of agreement on this.