The Bank of England’s Robert Jenkins launched a blistering attack on the UK banking sector earlier this week, accusing it of “intellectual dishonesty” as bank executives warned that new rules emanating from the Basel Committee could lead to reduced lending. In a speech in London titled ‘Lessons in Lobbying’, Jenkins undermined the banking profession, saying:
A profession which should stand for integrity and prudence now supports a lobbying strategy that exploits misunderstanding and fear.
Banks have argued that the Basel III rules, which force them to hold higher levels of capital (funds that can be used in case of crisis) and liquidity (central bank reserves to enable payments to other banks) would lead to reduced lending as the only way Banks could rebuild their balance sheets.
But Jenkins argued that banks could just as easily build up their capital by reducing bonuses, engaging in less speculative financial transactions and by issuing long-term debt and equity.
Jenkins’ words are important because he is a member of the new 11-strong Financial Policy Committee (FPC) set up by the Government to monitor the stability of the financial sector and ensure it supports the economy at the broadest level. Although the FPC does not yet have legal rights to force changes to the way banks work until next year, its members include some of the banking sector’s fiercest critics.
This includes Mervyn King himself but also Andrew Haldane, the Director of Financial Stability who recently argued that rules around the riskiness of bank loans should be changed to reflect their usefulness to society. On a similar theme, fellow FPC member Adair Turner, Chairman of the Financial Services Authority, has floated the idea of imposing differential leverage ratios on banks according to the social utility of their lending.
As confidence in UK banks worsens – the Bank’s own recent survey suggested that confidence in the financial system was at its lowest since 2009 – those charged with protecting our financial system have clearly decided its time to get the gloves off. And not a moment too soon.
Josh Ryan Collins is Senior Researcher, Monetary Reform for nef (the New Economics Foundation)