Most children probably don’t dream of becoming an economist and Andy Haldane, the Bank of England’s executive director for financial stability, was no exception.
However, while growing up in Yorkshire, he says the miners’ strikes and a “really interesting” teacher inspired him to follow a career path that eventually took him to the Bank of England.
“I didn’t get interested in economics until late into my A-levels,” Haldane says on a visit to Edinburgh to take part in a conference examining the aftermath of the credit crisis.
“My teacher was really interesting, which makes all the difference at that age. This was hot on the heels of the early 1980s recession and the massive unemployment problem.”
Miners’ strikes were also at the front of his mind as the parents of his school friends were being directly affected by the collapse of Yorkshire’s coal industry, “and that’s what set me off on economics and public policy”.
He joined the BoE in 1989 and is now part of the Bank’s financial policy committee – set up in the wake of the banking crisis to identify and reduce the threat of future meltdowns in the UK’s financial system – with responsibility for developing policy on financial stability issues.
Looking to the current crisis unfolding in the likes of Greece and Spain, Haldane believes Britain’s banks are in a “relatively better position” compared with much of the rest of Europe.
There is no denying the European banking sector has been through a torrid time, with governments injecting unprecedented levels of public money into banks. The European Commission approved €4.5 trillion (£3.6trn) of state aid – 37 per cent of EU GDP – between October 2008 and October 2011.
As far as Britain’s banks are concerned, Haldane insists: “We’ve been through our wringer and learnt some of our lessons, and we’ve strengthened our sea walls on capital and liquidity.”
However, he believes the banks could be doing more to help the wider economy by taking advantage of the capital and liquidity buffers they have built up in response to the crisis.
“When you’re in a bust, everyone’s pessimistic,” he says. “The banks are ducking for cover and don’t want to put risk on the table. But if no-one puts risk on the table, then there’s too little risk-taking, which is exactly where we are at the moment.”
In a renewed attempt to boost lending to small businesses, the UK government recently unveiled the National Loan Guarantee Scheme, or credit easing, after Britain’s big banks came under fire for failing to meet lending targets to small firms under the “Project Merlin” agreement.
The scheme, backed by £20 billion of government guarantees, will enable participating banks to provide a 1 per cent discount on fresh loans to businesses with annual turnovers of up to £50 million.
Two years ago, when the Bank of England was handed new responsibilities for micro- and macro-prudential regulation, governor Sir Mervyn King said the role of a central bank in monetary policy terms was “to take the punchbowl away just as the party gets going”.
Haldane returns to the theme when he says “occasionally you need to add a bit of vodka just to get things going” and encourage banks to start lending again.
“The buffers of capital and liquidity that we’ve built up are there to be used and absorb stress,” he says. “They’re there to protect the real economy and lending to the real economy when the going gets tough.”
Talking of tough, Haldane takes a firm line when asked whether regulators would ever be able to prevent a repeat of the banking crisis.
“I distinguish between banking failure and banking crisis. If anything, we’ve had too few banking failures, not too many, because for a variety of reasons the taxpayer has felt the need to ride to the rescue.”
He believes banking is a peculiar industry because it doesn’t function like typical markets, which tend to feature the “birth and death” of participants.
“There’s almost no entry and very little exit,” he says. “The essence of capitalism and the market mechanism is that people come and go. That refreshes the pool and that’s what drives the industry forward.”
The lack of new blood coming to the market is a cause for concern, and Haldane says one “gobsmacking” fact contained in Sir John Vickers’s banking report was that, until 2010, “we’d gone a whole century without a new bank being set up in the UK”.
He adds: “We’ve had a bit of entry since then. Looking around I see Virgin Money, Sainsbury’s and Tesco with headquarters in Edinburgh and that’s terrific.”
Vickers has drawn up proposals that argue banks’ investment activities should be ring-fenced from their retail arms, and Haldane believes this plan, together with the Volcker rule in the United States that aims to prevent deposit-taking banks engage in risky trading, is a key example of how future meltdowns could be prevented.
Paul Volcker, the former chairman of the US Federal Reserve who drew up the rule, recently said JPMorgan’s $2bn (£1.3bn) trading loss in London may show that the largest banks have become too big to manage, and Haldane appears to have some sympathy with this view.
“We’re talking about institutions with assets the size of the GDP of a G7 country,” he says.
“The capacity to have a clear line of sight on all the risks they’re running is quite a feat. Especially when very few of the biggest banks, even to this day, conduct effective and consolidated risk management across their whole balance sheet.”
Tipped as a successor to King when the current Bank of England governor retires in a year’s time, Haldane insists he has “no idea what I’ll be doing next week, let alone next year”.
But he adds: “I suspect I’ll still be in the area of public policy because that’s what gets me out of bed in the morning.”
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Weather for Edinburgh
Sunday 19 May 2013
Temperature: 9 C to 17 C
Wind Speed: 7 mph
Wind direction: North east
Temperature: 10 C to 20 C
Wind Speed: 8 mph
Wind direction: North east