WE LIVE in a culture in which there are calls to “review” seemingly every political decision. So the fact that the Bank of England commissioned three separate investigations of its conduct during the
financial crisis might appear run of the mill.
On the contrary, the Bank was resistant to allowing its internal operations to be put under the microscope, only relenting in May after a string of hopelessly wrong inflation forecasts.
The reports cover three areas. One from David Stockton (who worked for the Fed) looks into the Bank’s disastrous forecasting. Another, by former Bank insider Ian Plenderleith, reviews the bail-out of Royal Bank of Scotland and HBOS in 2008.
Finally, investment banker Bill Winters examines the Bank’s machinery for providing liquidity to the financial system.
They are written in Delphic prose, presumably in order not to frighten the children. No individuals are called to account for the central bank’s alarming inability to predict inflation trends, which Stockton puts down to deep-seated institutional insularity. He recommends the Bank talks to more outsiders. In reply, the Bank says (huffily): “We accept that the Bank should do more in this regard.”
As to the bail-out, even Plenderleith (who worked for the Bank for 36 years) is disturbed by the fact that Sir Mervyn King lent tens of billions to RBS and HBOS without consulting the Bank’s governing Court. The flexibility this provides in emergencies is understood, but it does mean one man can hazard the Bank’s balance sheet. Plenderleith recommends a tighter reporting structure, as does Winters.
Plenderleith and Winters want the Bank’s capital increased so in the future it can extend emergency financial support beyond traditional banks to shadow banks and major counterparties, such as hedge funds.
That would give the Bank – which failed to recognise the bubble – even more influence.
Reading between the lines, the Bank of England won’t reform until it has a change of leadership. King retires in June.
Hester hampered by dragging anchor chains
MORE bad headlines for RBS as it was forced to put aside another £400 million to compensate customers for mis-sold loan insurance. Yet not everything was negative in Q3.
Group operating profits were £1 billion, up from a meagre £2m in the same quarter last year. Bad debts were down 12 per cent on Q2 and the staff bill fell 5 per cent. Captain Stephen Hester is steering his ship out of danger. Just a pity it is still dragging anchor chains from the past.
My own view remains that he may be looking in his rear-view telescope a mite too much.
The most worrying thing lurking in the Q3 accounts is not the Libor time bomb. Income in the core UK retail business (which includes mortgages) is down on the year.
Ditto for retail operating profits. Income from credit cards is particularly disappointing. The UK corporate business also saw a drop in income and profits, for the quarter and year-to-year.
These numbers reflect the weak state of the UK domestic economy. But Hester has, after all, targeted UK retail and commercial bank lending as the future for RBS.
Perhaps it is time RBS stopped behaving like the Incredible Shrinking Man and recovered some of its commercial aggressiveness.