King crushes Darling at Mansion House
ON the face of it, last night’s Mansion House dinner was a typical, formal City occasion, with the black tie-clad great and good of the business community turning up in their usual numbers. But there was little of the good-humour and wry amusement that usually accompanies such occasions; many of last year’s guests hadn’t been invited this year because their firms or their jobs didn’t exist any more. The mood at the gathering was sombre, even if most of the guests now believe (rightly, in my view) that the worst of the recession is behind them. But they also realise that with the end of the fire-fighting comes the rebuilding and the regulatory onslaught – banker-baiting is not as popular a pastime as it was three months ago, but these are hardly comfortable times to be a banker, insurer or merchant.
Alistair Darling’s speech didn’t say very much we didn’t already know, with one key exception: he will next week be setting out “a new tax code for how the banks can meet their obligations”. This could be massive.
But it was Mervyn King’s speech that stood out. In breadth and quality, it easily overshadowed Darling’s rather pathetic effort, even if not all of his arguments were convincing. He launched a devastating attack on Darling, demanding the government “produce a clear plan to show how prospective deficits will be reduced during the next Parliament”.
He rightly argued that “price stability does not guarantee stability of the economy as a whole” but I wasn’t convinced by his argument that interest rates need to continue to be used solely to target inflation, rather than to tame credit growth. The Bank’s greatest failure was to allow the growth in the money supply to surge out of control; and that should have been tamed by higher interest rates. It is a diversion to blame the private banks.
King pointed out that the size of our banking system was, as a proportion of GDP, five times that of America’s; and that risks associated with proprietary trading are harder to control in limited liability companies. His conclusion: we need instruments to prevent the size, leverage, fragility and risk of the financial system from becoming too great. This puts him closer to the Tory position and far away from Darling’s.
It is worth analysing King’s core argument in detail as it will be taken seriously by the next government. He argues that it makes no sense to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure. So he is not arguing for a Glass-Steagall separation – but for a different sort of change. Either those guarantees to retail depositors should be limited to banks that make a narrower range of investments (this would be hard to introduce), or banks which pose greater risks to the economy in the case of failure should face higher capital requirements (a likely outcome), or we must develop resolution powers so that large, complex financial institutions can be wound down in an orderly manner (also likely, King wants banks themselves to produce their own plans or “wills”).
There will be much change ahead. Let us hope that it is calmly thought-through – or else the City will never recover, and London’s prosperity will be destroyed irreparably. allister.heath@cityam.com