After gaining prestige for his role earlier last week in action by central banks to increase liquidity in the worldwide banking system, BoE Governor Mervyn King turned very gloomy by the week’s end.
He warned banks that they must increase their capital reserves to face the coming Eurostorm. They should consider retaining some of the ‘profits’ they planned to dispense to their staff he added.
In response assorted MPs and business leaders huffed and puffed at the week end because his gloomy predictions were ‘scaring financial markets’.
Undeterred, he let it be known that this was a serious crackdown. The Bank’s Financial Stability Report noted that the Financial Policy Committee, which has the power to set new rules on bonuses thought: “that performance metrics, such as return on equity targets, that take little account of the risks taken to achieve them could be distorting incentives”.
There wasn’t much evidence the Governor had been scaring markets with the Footsie 100 index sharply up at the end of last week.
And he definitely wasn’t scaring the banks. Barclays, for example, was reportedly planning to pay its investment bankers an estimated £5 billion this year despite his calls for restraint.
However the banks may heed other voices. The Association of British Insurers for example is saying: “It is our members’ view that it can no longer be business as usual for this remuneration round.” Why should the banks care? TheABI’s members own about a fifth of Britain’s publicly traded shares. Their idea is that some of the bonus cash should be diverted into shareholder dividends to preserve investor returns. Not quite what the Governor had in mind.
However, he has other allies; Chancellor George Osborne is on the Governor’s side. “We need stronger banks not larger bonuses this winter,” he told parliament on Tuesday.
It remains to be seen whether the Chancellor’s ideas on what makes for a stronger banking system offer any other serious and constructive changes. He told the Treasury Select Committee during the week that he will respond to theIndependent Commission on Banking’s (ICB) recommendations on December 19th. Will this mean a Happy Christmas for Positive Money supporters?
Meanwhile Eurozone and UK banks have their own ideas about what will make them stronger. They are reportedly buying back their own bonds, on the cheap of course.
And this week one those other enigmatic players in the financial markets, the rating agencies, turned up the pressure to the Eurozone politicians and their banks. Standard & Poor’s downgrading of Eurozone national debts and banks’ stabilitywas a masterpiece of timing ahead of the upcoming treaty negotiations. All that is a step too far for this news round up but you have been warned; there is bound to be a fallout affecting the UK banking system. The imposition of a tax on trades in financial derivatives is just one.
And right now we wait to see whether the Bank of England will print more money. Earlier in the week Some thought another dose of the Bank of England’s multi-billion-pound money-creation programme could be on the way. Others think it not so likely. We’ll know soon enough.