Another day, another authoritative judgement from outgoing financial regulator the FSA. Isn’t it a shame that the watchdog had to wait until its last few months on the job before really starting to bark loudly enough for anyone to hear?
Yesterday self-certification ‘liars loans’ were deservedly under its cosh, today in a speech at the LSE, chairman Adair Turner will attack the ‘fundamental drivers of credit supply instability’ (he can't help using this kind of language - he used to be a management consultant after all).
That is to say, what it is that causes credit to go from being too freely and cheaply available in a boom to too expensive and hard to get in a bust. Turner rightly identifies this as one of the key issues, not only inasmuch as it helped cause the crash but also as one of its most painful and damaging consequences as far as average Joes and Joannas are concerned.
It’s doubly true of business, SMEs in particular. We’ve all heard the horror stories of businesses which are still trading effectively being arbitrarily wound up because the bank, having happily extended lines of credit in the good times, suddenly gets cold feet when its support is really needed.
For one who famously criticised banks as ‘socially useless’, Turner also seems to have become rather more sanguine on the subject of pay. Attacking bonuses may make a point about the social acceptability or otherwise of some bankers’ behaviour, but, he now admits, it won’t on its own do much to stop another crisis from brewing.
All of which sounds pretty sensible to us here at MT, in theory at any rate. Bonuses are too easy a target, and abrupt reversals in the credit cycle don’t do anyone in the ‘real’ economy much good.
However, persuading the City to swallow this particular pill will be another matter altogether. The logical consequences of Turner’s position is that regulation should be ‘context sensitive’, ie loose in the hard times and tighter than a German central banker in a Greek bar in the boom years.
He calls it ‘leaning against the wind’ and the net effect would be a systemic tightening of the credit supply. About as welcome in the financial community as a joint delegation from the White House, Exxon and Greenpeace would be in the BP boardroom. Banks – and indeed most other forms of enterprise – don’t generally welcome external restrictions on how and when they make their money.
It’s also likely to be very difficult – perhaps impossible – to implement, as it would require banks to adopt an inverse relationship between risk and price, lending more cheaply when risk is high and more expensively as it falls. Either that or adopt radically different and very complex risk models which pay as much attention to systemic issues as they do those of an individual transaction. Good luck with that one…
The other big financial regulatory news today (there’s a phrase you don’t read very often) is that it looks as if one of the three new European super-regulators will now be based in London after all. Until only a few days ago, Frankfurt seemed to have got the gig, but a last minute rearguard action by France and the UK seems to have turned this around.
The French may not have much time for the Anglo-Saxon commercial model, but they are equally unimpressed by attempted German landgrabs. So it looks as if all the people who could end up out of a job when the FSA is broken up might be able to find themselves a safe new EU gig just down the road…
In today's bulletin:
Falling unemployment not all it seems
Would you credit it? Turner calls for pricier lending
Chips with everything as Intel smashes forecasts
Letters from Malawi: My kingdom for a sandwich
Hefner caught in love triangle over Playboy