Hacking, Darling and the Michael Jackson funeral sandwich

14 July 2009

Come last weekend chancellor Alistair Darling could afford to smile and pour himself a Scotch.

He hadn’t got away with murder but a crime against reason which was down to a fortuitous conspiracy of events that overshadowed the publication, midweek, of his White Paper on banking reform.

Thanks to Michael Jackson’s funeral on the Tuesday, and breaking news about the News of the World allegedly hacking into the phones of c-list celebrities and has been politicians, his blue print for banking crisis-free future failed to make front page headlines.

That would have given upwardly mobile politicians no cause to celebrate but Darling is in a different class and his latest missive, like his politics, lacks conviction and intellectual honesty.

I mean, what is the point of a paper that advocates macro-prudential regulation if the Treasury itself acknowledges in the document that “in practice it is difficult to identify unsustainable macro-financial trends, such as asset price bubbles and excessive credit growth”, adding, “Strong growth in asset prices per se does not prove the existence of a bubble."

The only surprise in the paper is that Darling bothered at all, given that the current government has less than a year to run and so much of the future of regulation must rest with the reform of Basle II and what happens in Europe and the wider international arena.

Put simply, the white paper seeks to shore up Gordon Brown’s discredited tripartite system of regulation with a Council for Financial Stability. This Darling claims, without the slightest hint of embarrassment, will have teeth, and add transparency while ensuring the confidentiality of market sensitive discussions.

Other than that, the paper borrows rather heavily from Lord Adair Turner’s own vision, drafted about four months ago, on how he, as the new chairman of the Financial Services Authority, sees the future shape of regulation in the UK.

But overall, what is really scaring for mortgage lenders and the banking community generally, is an apparent move away from using interest rates as a mechanism for controlling credit, to an emphasis on the level of capital that banks will have to hold in relationship to their lending.

A gloomy insight of how the two mechanisms might interact is already available in the building society sector.

Here a politically motivated bank base rate of 0.5% (to keep the level of repossessions down), coupled with the FSA’s ridiculously high liquidity and capital requirements, is threatening to turn low risk businesses that have been viable for over 150 years, into an unsustainable financial model.

It is something of an anomaly in government thinking that in its search for a sustainable planet car manufacturers are expected to ever improve the efficiency of the internal combustion engine while in the world of banking it is seeking to stifle the leverage on capital that innovation has delivered, so threatening the growth of home ownership and improving living standards in the UK and around the globe. In its quixotic quest to avoid the realities of life it has forgotten what banking is all about.