Home > Opinion > Hal Austin
Appearances matter
Why is the chancellor, obviously pressured by Treasury mandarins, allowing himself to be used in an old turf war with the Bank of England, and at the same time allowing an obviously dysfunctional and potentially dangerous regulatory framework to get on the statute books?
What went wrong leading up to the financial crisis, although not seen at the time, is now quite obvious. It was the opacity of off-balance sheet activities by the banks, both commercial and investment, and shadow banks and the counter-party risks taken by some insurance companies.
It was a failure of risk management and the remedy is simple – words that hopefully would not come back to haunt us.
Separate investment and commercial banks, restricting the high street institutions from indulging in the activities that led to this meltdown. Return supervision and regulation of the commercial banks, the ones that pose a systemic risk to the real economy, to the Bank of England.
Give the FSA authority to regulate hedge funds, investment banks and other shadow banks.
What makes the whole thing so unsavoury is that the Tories are making it clear that they prefer returning supervisory and regulatory powers for banks to the BoE. So, there is a danger that the debate will be coloured by political bias.
But sensible readers should dismiss this line of thinking. Mervyn King, the governor, has ruffled feathers through his reluctance to jump to the rescue to banks which found themselves in trouble through their own negligence.
His argument, that of moral hazard, was right at the time and remains so. Just look at the almost criminal way in which some banks are returning to the old, discredited, bonus-focused days and you have a classic idea of moral hazard at play.
Lord Turner is a wordsmith and can put a good case for the organisation he heads, but that does not make him right, just as Mervyn King may be donnish in his delivery, which does not make him wrong.
