Banking Regulations: Too Costly Or Needed To Curb Reckless Behavior?

Bankers are claiming on both sides of the Atlantic that post-financial crisis regulations are far too complex and costly. Are they right? Or are the new regulations needed to stop a repeat of the 2008 crash? I consider those questions in the Daily Mail.

HSBC Off

I have not been able to post for several months because of the nature of the advisory work I was doing in the past few months. But now I am back! And my last post in the autumn predicted the departure from London of some of the big banks, notably HSBC. Now this in today’s Telegraph about HSBC informing privately its biggest shareholders of the likelihood of a move of its HQ to Hong Kong – a big blow for Britain’s coalition government.

Labour Turns The Clock Back

Well, if the election of Forrest Gump (err, sorry, Ed Miliband) as the new Labour leader isn’t enough to have put paid to the British electorate embracing Alternative Voting – that is when the country is asked in a referendum whether it wants it to replace the current first-past-the-post system for general elections — then nothing will.

“Red Ed” owes his election entirely to Labour’s skewed AV system, one that saw his brother, David Miliband, win on first preference votes and secure the backing of party members and MPs. Ed can thank a gaggle of militant union chiefs for his victory. It is a turning of the clock back for the Labour Party, which only after the herculean efforts of New Labour and a succession of leaders – John Smith, Neil Kinnock, Tony Blair – escaped the grip of union chieftains.

“I’m nobody’s man. I’m my own man and I’m very, very clear about that,” Ed Miliband claimed yesterday in a BBC interview. His insistence with the inclusion of “I’m very, very clear about that” seemed a little as though he were trying to convince himself.

For all his talk that he won’t be in the thrall of the unions and lurch the party to the left under his leadership there was little in the way of details to support this in the policies he has been trotting out. He wants new taxes for higher paid workers, an assault on City bankers and new trade union rights for employees. And he will oppose Coalition plans to reform extravagant  public sector pensions. He wants deficit reduction to be slower than is currently the plan of the Coalition government.

Max Hastings nailed what Ed’s election means in his column today in the Daily Mail. “The party Ed Miliband’s supporters expect him to lead wants to address how taxpayers’ money is spent – not how it is earned. It esteems fairness above excellence and care of the disadvantaged minority above the interests of the majority. It values the protection of perceived losers above the advancement of strivers and winners. It is, in other words, the old party of Callaghan, Foot and Kinnock.”

And Max is right, I think, when he maintains that Ed’s pledge to fight for the “squeezed Middle” is meanginless until “Labour discovers the honesty to acknowledge publicly that Britain is broke because the Blair-Brown governments saddled it with wholly unaffordable – as well as inefficient and wasteful – public services.”

Killing The Goose

The Times has a photograph above its story on President Obama’s populist lunge at the banks with a protester holding up a placard reading: “Greed Kills.” Stupidity does, too. The real facts are that the tremendous economic growth and globalization unleashed in the 1990s did more to reduce poverty in the World and open up opportunities for the young than all the talking shops in Washington DC, New York, Brussels and Geneva achieved in the previous three decades.

Of course, there needs to be more regulation of the banks but “animal spirit” is what drives capitalism and for all its many faults capitalism has the potential to do more good for mankind that the Luddite and statist systems can ever accomplish. Obama’s proposals to limit the size of banks and return the clock back to Glass-Steagall — supported apparently by John McCain and applauded by the Conservative leadership in the UK — will, if put into effect, result in the following consequences:

Banking profits will be reduced, resulting in individual customers having to pay more for personal banking and small business will find it harder to secure loans at favourable rates.

New York and London (if the Conservatives or Labour follow suit in the UK) will see more banks, hedge funds and finance houses relocating outside their jurisdiction and benefiting Gulf and Asian countries (and Switzerland) – they will be happy to welcome them. The move in short will encourage a quicker shift in the balance of economic power away from the West.

There will be tax losses to the US and the UK, putting even more pressure on ordinary taxpayers to pay down the national debts.

Economic growth will be slower and it will take longer to recover from the recession.

The housing market will remain anaemic.

A better way to reduce risk without bringing about the consequences above would be to increase the capital reserves the banks have to hold. But that sounds less purposeful than denouncing “fat cats.”

Gone Fishing…

It is hard not to feel a tinge of sympathy for the Royal Bank of Scotland’s chief executive Stephen Hester. Today, he endured a grilling from MPs over proposed bonuses — about a billion pounds in total — that RBS will be handing out. His point is that the bank has no alternative, if it wants to remain competitive by retaining top staff.

He insisted before the Treasury Select Committee in the House of Commons that his policy was to pay “the minimum we can get away with in the market place,” adding: “Shareholders have raised concerns about our ability to keep and motivate good people.”

He may have a point, but citing shareholders was a tad undiplomatic when RBS is now 84 percent owned by British taxpayers, and the new owners seem more concerned about bonuses being paid out at all than whether RBS can keep “good staff.”

At least Hester appears to understand that persuading the public otherwise is going to be a huge challenge — some would say impossible. Asked by one MP about what plans he had to persuade the public of the need for the forthcoming bonuses, Hester said with a rueful smile that he had been thinking of going on holiday, although even if he did he wouldn’t be able to escape the fallout.

So can we take it that RBS like other banks still has not fathomed out a communication strategy to cope with the public’s disdain?

The Law of Diminishing Returns

Bad news for Britain’s Labour government right on the eve of tomorrow’s unveiling by Chancellor Alistair Darling of the annual Budget.

The IMF now estimates that the cost of the bail-out of Britain’s banks will amount to 13.4 per cent of the UK’s entire economic output of £1.46 trillion in 2008. Of OECD countries, only Ireland will pay more as a percentage of its output to rescue its banks. So much for Prime Minister Gordon Brown’s proud boast of having ended boom and bust cycles.

And the respected British think-tank the Institute for Fiscal Studies has warned that tax hikes are unlikely to help pay for the bailout or mitigate the consequences of recession. The institute warns that raising the top rate of tax to 45p as proposed by Brown will prompt an exodus of top earners as well as greater use of tax avoidance schemes.

The Treasury has sniffed at the institute’s prediction, saying ,“The Treasury remains confident in its forecast revenues for the new 45p rate of tax as set out.” Now is that the same Treasury that came up with all those glowing forecasts about how Britain under New Labour had found that magic to escape busts?