|  |  |  | | | | | Peston's Picks - Robert Peston | | | | | | | | | | | | | | | | | | | Gordon Brown says that the eurozone will not solve its current financial crisis unless it opts for a comprehensive and substantial rescue package, that would involve putting tens of billions of pounds of new capital into the eurozone's banks. The former British prime minister said, in an interview I've just done with him, that the enormous liabilities of the eurozone's banks are a serious and substantial accident waiting to happen. Mr Brown said: "I sense that in the first few months of 2011 we have a major crisis in the euro area... You've got fiscal deficits, obviously. But you've also got massive banking liabilities in the euro area, and that's not just the peripheral areas. It's the core areas of Europe where banks are really under pressure because they have lent huge amounts of money but have no guarantee they have the capital that is necessary to sustain themselves in all positions.
"But then you've also got this impediment to growth. The euro area is inflexible because you can't adjust your currency... The structural reforms that are necessary to make a single currency area work have not been completed and in some cases have not been agreed. And therefore you've got to have a nigh noon...You've got to deal with these problems in one fell swoop... They've got to do it in a way that seizes the initiative from the markets... It's got to happen in the first months of 2011." His fear is that the current process of bailing out one over-stretched eurozone country at a time (Greece followed by Ireland, so far), rather than going for a once-and-for-all bailout scheme for the entire eurozone and all its banks, will elongate and maximise the economic pain for eurozone members. In those circumstances, international investors would "pick countries off (for punishment) one by one". He added that "if the euro were to break up, the political and economic consequences for all the countries would be disastrous" and the cause of global economic co-operation would be set back for years. Also, if there is no comprehensive and credible rescue and reform package for the eurozone, he feared that European countries would - at best - be condemned to years of low growth and high unemployment. This would damage the UK, which conducts 50% of trade with eurozone members. Mr Brown's intervention matters, partly because he remains in contact with other European leaders - and partly because he is saying what members of the British government and senior officials at the Bank of England also believe but cannot say (for diplomatic reasons). He is pessimistic about the short term outlook for the global economy, because of what he sees as a rise of nationalist and protectionist tendencies in many countries, similar to what happened in the Great Depression of the 1930s. The central theme of his new book, Beyond the Crash, is that the US and Europe will be condemned to years of low growth unless and until the world's biggest economies co-ordinate their economic policies and their approaches to financial regulation, not just to tackle individual crises but on a permanent basis. For banks in particular he calls for a new "global banking constitution", that would go further than the current Basel agreement on capital to set rules and standards for all the world's banks, over-riding national regulations. I reminded him that years ago, when he was at the height of his reputation as chancellor, I asked him why on earth he wanted to risk his then formidable reputation by becoming prime minister. Did he now regret having moved into No 10? If he had a regret, he said, it was that he had failed to convince the electorate of the overwhelming importance (as he see it) of a great worldwide initiative to restore momentum to the global economy. | | | | | | | | | | | | | | | | | | | | | | | | | Directors of banks responsible for catastrophically bad decisions, which put their respective banks in jeopardy, could face a new punishment of having two years' pay clawed back from them. Lord Turner, chairman of the FSA, told me that he was attracted to imposing such a sanction - which is part of the so-called Dodd-Frank financial reforms in the US - as a way of discouraging banks from taking excessive risks. The clawback of bank bosses' pay would be punishment for misguided or stupid behaviour, rather than for illegal behaviour. He was elaborating on an article he has written in today's Financial Times [registration required], which looks at the lessons of the FSA's investigation of how the Royal Bank of Scotland took itself to the brink of bankruptcy in the couple of years before it was rescued by taxpayers in October 2008. The FSA has been widely criticised for saying that its review finds no grounds for punishing the senior directors of RBS at the time or the bank itself. Its decision not to publish the investigation has also been attacked - and yesterday the Business Secretary, Vince Cable, said he was disappointed that no report on the affair has been published by the FSA. Lord Turner is open to the idea of publishing such reports in the future. However he says that this investigation was carried out according to normal FSA procedures, which makes it difficult to publish because the probe was broken down into separate parts. Documents were prepared by the FSA's enforcement department on the events leading up to the disastrous purchase by Royal Bank of Scotland of the rump of the Dutch bank, ABN, in 2007, on the control mechanisms in RBS's global banking and markets division, and on whether RBS disclosed accurate information to investors in this period, especially when launching a jumbo rights issue in the spring of 2007. In other words, a single seamless narrative of what happened at RBS wasn't prepared. That said, Lord Turner sees the argument that publishing such a narrative could have been useful, in that it would allow future bank directors to learn the lessons of RBS's mistakes. So in future the FSA may organise its investigations in such a way that a report can be published at the close. However, the big lesson for Lord Turner of the RBS debacle, and other banking disasters, is that there has to be a cultural revolution in banks, such that bank directors never think about taking the risks that may be appropriate to other kinds of business - not least because the economic damage from bank failures is so great, and because taxpayers are forced by governments to inject colossal sums into the likes of RBS, to prevent them going bankrupt, in a way that almost never happens in any other industry. Although the kind of entrepreneurialism that leads to bankruptcy may be essential to wealth creation in the hi-tech industry or retailing, it is wholly inappropriate in banking, Lord Turner believes. For him, RBS's directors should never have contemplated taking on the financial risks that were forced on RBS through the purchase of ABN - and the FSA should have prevented the deal going through. It should have been palpably obvious to RBS's directors and to the regulators that the deal was leaving RBS with far too little capital for absorbing potential losses, relative to the combined assets of RBS and ABN - and that the deal made the bank far too dependent on unreliable wholesale funding. That said, these were mistaken business decisions, albeit of catastrophic consequence, not illegal business decisions. That is why Lord Turner believes there has to be a new, special regime of potential sanctions for directors of banks. Apart from the US idea of demanding substantial refunds of top bankers' pay, if they make devastatingly bad business decision, Lord Turner also argues that senior bank directors should perhaps be automatically disqualified in those circumstances. The burden would no longer be on the FSA to prove that the directors had broken laws or rules. Instead, the directors would have to demonstrate that they had taken steps to try to prevent the misguided takeovers, dodgy lending or ill-judged investments that sank their respective banks. If the directors could prove neither that they had argued against those bad deals nor blown the whistle to the FSA, there would be no uncertainty about their fate, no long review of their behaviour by the FSA: they would face automatic eviction from the bank boardroom. | | | | | | | | | | | | | | | | | | | | | | | | | The Banking Commission and the Treasury are in effect powerless to force through radical structural changes to the UK's banks, to break up the giant universal banks such as Royal Bank of Scotland, HSBC and Barclays, without agreement from the European Union. Which may well turn into a great frustration for the Banking Commission's members, because my strong impression is that they are in favour of some kind of break-up of the largest universal banks - which would involve separating their retail banking and money transmission operations from supposedly riskier investment and wholesale banking. To be clear, this break-up might not involve formal forced removal of investment and wholesale banking out of the likes of Barclays into wholly independent new organisations - which is broadly what the governor of the Bank of England, Mervyn King, seems to favour. The preferred reform might consist of putting an impermeable legal wall between wholesale/investment banking and retail banking, so that if a bank ran into difficulties, the so-called resolution procedure would allow the regulator to hive off the precious retailing banking operation to protect savings and the money transmission network. This kind of internal resolution break-up is preferred option of Lord Turner and Hector Sants of the Financial Services Authority. That said, right now the commission - which consists of former regulators and erstwhile bankers - seems to me to be leaning towards a definitive, physical break-up of the mega-banks. However it turns out that neither of these major structural changes to our banks would be easy to do - in fact they might be impossible - without a decision by the European Union to force such reforms on all European banks. "The UK's ability to force major structural changes on its banks is very very limited," said a source close to government. The reason is that under EU law, any EU authorised bank has the right to set up a branch anywhere in the EU. Which means, for example, that if Barclays did not wish to be broken up, it could move its head office to Luxembourg (for example) and then operate the whole of its retail banking and investment banking operations in the UK, as normal, in the form of a "branch" of the Luxembourg-based bank. Also, any continental bank, such as Deutsche Bank or Santander, could operate both retail and investment/banking operations in the UK, even if Barclays, HSBC and Royal Bank of Scotland were somehow persuaded to comply with a British decision to break them up. What does it all mean? "My own view is that the Commission may well recommend that the big universal banks should be broken up," said a well-placed British official. "But in practice, even if the chancellor accepts that recommendation, the Treasury would not be able implement it. Instead the chancellor would probably then have to persuade every other EU country to break up their giant banks". So how likely is it that Germany would wish to break up Deutsche Bank, France would choose to dismantle BNP Paribas and SocGen, and so on? Right now, that seems about as probable as France and Germany forcing all cars to drive on the British left-hand side of the road or to adopt British-gauge railway track: giant universal banks are part of the continental financial tradition: ingrained in European business culture, part of the structure of the state. But that doesn't mean the European love affair with the mega universal bank is necessarily forever. As I have pointed out here on a number of occasions, the threat of a fracture of the eurozone stems as much from the potential liabilities of European taxpayers to the enormous risks that have been taken by some European banks relative to their smallish capital resources as from the unsustainable deficits of certain eurozone member states. To put it another way, if the eurozone were to become the centre of another great banking crisis - not a completely absurd idea, given recent events in Ireland and Portugal - it is possible that the EU would decide that some form of break-up of the biggest banks was not some insane British obsession but was worthy of consideration. | | | | | | | | | | | | | | | | | | | | | | | | | The banker trying to negotiate some kind of lasting truce between the government and the banks is John Varley, the soon-to-depart chief executive of Barclays - who (by the way) is the front-runner to be the next chairman of Vodafone, the mobile phone giant (or so I am told). Mr Varley's main interlocutor in this dialogue is Oliver Letwin, the cabinet office minister. And, according to their colleagues, the talks are about the wider questions of how the reputation of banks can be rehabilitated and how banks can make a greater contribution to the UK's economic recovery, and not just what can be done to improve the perception of the quantum of bankers' bonuses. Now you might think that the boot is only on the foot of the cerebral Mr Letwin, rather than Mr Varley's. But that wouldn't be correct, because so much of what the government wants to achieve isn't possible without co-operation from the banks. Economic recovery? Well that will be more insipid if banks aren't enthusiastic providers of finance to businesses, especially small businesses. Shrinkage of an unsustainable deficit? Harder if banks don't recover and don't start making their disproportionately significant payments of corporation tax once again - and harder still if they relocate head offices to overseas financial centres. Reduction in unemployment? As per the first two points. Creation of a so-called "big society"? Again, that'll be easier if the banks are keen supporters of the Big Society Bank, which is to distribute the estimated £500m contents of dormant bank accounts to community groups and social enterprises - and which could have disproportionate oomph if banks put a bit more money into it and if it were staffed and managed by secondees from banks. What does all of that mean? Well that the government - and to an extent the rest of us - needs the good will of the banks perhaps as much as the banks need the good will of government. It shows that - for all the financial support given to banks in 2008 and 2009 to keep them afloat (equivalent to 90% of GDP at its peak) - the banks don't feel like pathetic debtors in their relationship with government. I am not sure what that means in respect of how meaningful will be the pact that emerges from these talks. It is likely that there will be a joint statement from the banks on how they'll make sure bonuses and big rewards only go to those bankers who genuinely make a superlative contribution to their profits - and that (as per new EU stipulations) only a fraction of these rewards will be upfront cash payments (as opposed to deferred payment in shares). So there will be an implication that there will be a crackdown on the widespread practice of paying substantial sums to replaceable, so-so bankers - though it is very unclear how a return to what most would see as sanity in bankers' remuneration would be policed. Also, and not for the first time since the great banking crisis of two years ago, there are bound to be pledges that adequate credit will be provided to the private sector - together with commitments on supporting the Big Society Bank, and on training and employment creation (which may look a bit odd coming on the heels of more than 40,000 job cuts by RBS and Lloyds since 2008). In return, the banks say they want an end to ministers sniping at them and criticising them in public. Would that be a fair exchange? Over to you.
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