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A failure of regulation?

Posted by Richard Monday, October 13, 2008

Snippets from two BBC interviews today

BBC Radio 4 Today Programme

An interview with Sir George Cox, former senior independent director of Bradford and Bingley and Patrick Minford, of Cardiff Business School.

INT: .. [do] you welcome what Gordon Brown has done as perhaps the best plan in the … the best going plan in the world?

Patrick Minford: Yes, I think it's well thought out. And, of course, it's a circumstance we don't want to be in. But given that the banks have failed in this spectacular way and the regulators who were regulating them allowed them to do all this, we really have Hobson's choice.

Later …

INT: Where's the banking sector going over the next few years? …

Patrick Minford: We'll we've got to restore competition and restore credit availability. The great thing we had in the last twenty years was competition between banks and that was very good for the consumer. The trouble is that the regulation of it was very poor and the banks were allowed to take risks they shouldn't have been allowed to do under the Basel conditions. So, as we look forward, we've got to make sure that they play by the rules and also compete with each other and get back to the sort of competitive situation that was so good before this debacle.

INT: George Cox is grimacing as you say all that…

Sir George Cox: Well, I agree we want regulation but the impression's given that there wasn’t regulation before and the FSA just sat here and did what they like. It wasn't. We were supervising the wrong thing. They were concentrating on credit risk which wasn't the problem and not looking at funding risk.

Patrick Minford: That's not true … I think the point is that the banks were not regulated in terms of settng up these special investment vehicles which had enormous risks but they weren't made to put up capital that was proportionate.


Then ... BBC Radio 4 World at One

Prof. Tim Congdon

INT: ... I asked him if thought the government was doing the right thing (partial nationalisation of the banks).

Tim Congdon: No, it's doing quite the wrong thing. It's totally ignoring shareholders' interests. The way this should have been done was by a lender of last resort facility from the Bank of England. Alternatively, the money could have come from the States. And it could have been done through these preferred bonds on a high rate of interest but not at a rate of interest that destroys the businesses. The way the government's going about it is they're effectively stealing from the shareholders. British banks won’t like this and I'm afraid the long run result will be to destroy the competitiveness of Britain's most important industries and one where it's been a world leader in the last twenty or thirty years.

INT: Stealing from shareholders is a very strong way of putting it. If the banks are recapitalised, put on a firmer footing, in the end won't shareholders benefit?

Tim Congdon: No, because they have to share the equity with the government. The Royal Bank of Scotland has £60 billion of shareholders' money at the moment. Because of the way the government's behaved, that is valued by the stock market at a much lower price. If the government comes in at that lower price, then the existing shareholders lose a big chunk of the bank that they own and as a result they're worse off. That’s the big problem with this. And we're going to find in the next few days that the banks will be making a noise and they will warn the government.

INT: But if the bank in which you've invested has behaved recklessly and ended up in this position in the first place, isn't that a danger that you have to take?

Tim Congdon: (agitated) British banks have not behaved recklessly. This is an outrageous slur on the bank industry. British banks have got to comply with regulations. They are inspected all the time by the Financial Services Authority. They're audited and watched and they are not reckless. Can I just say that, an example of this, the allegation that Northern Rock was reckless. Northern Rock has repaid more than half of the loan from the Bank of England already. There was nothing wrong with Northern Rock. There's nothing wrong with the Royal Bank of Scotland. The problem is the government and the Bank of England.

INT: Isn't the problem that the banks got into debt. They took on so-called toxic assets. And in other words actually were in a very dangerous position which was why they're having to be bailed out now.

Tim Congdon: (very agitated) Look, banks are always in debt. That's what their business is. They borrow money in order to lend money.

INT: But it's a question of the ratio isn't it. And what people are saying about the banking industry now is that it's too highly leveraged. It went too far.

Tim Congdon: They're subject to controls and they have met those controls. They have done what they were supposed to do. They're watched all the time by the regulators and the Bank of England, and indeed the Treasury and the government. The way in which this government is behaving will ruin one of our leading industries. The City of London will move elsewhere.

In neither instance did the interviewers follow up, and nor were the issues raised discussed with other commentators or on other bulletins.

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  • Other posts on the financial crisis here.