It is the regulators who now pose the biggest threats to financial stability

It is the regulators who now pose the biggest threats to financial stability

Some fear a regulatory brain drain as the best supervisors are taken in-house. All in all, it’s not a bad time to be a regulator – particularly one that wants a pay rise.

Perversely, though, it’s those very regulators who now pose the biggest threats to financial stability. Banks have been beaten up so much since the crisis they daren’t speak out. But, privately, they’re saying: “Physician heal thyself.”

They point to governments that are trying to game the international capital rules to steal an advantage over neighbours; stalled negotiations on dealing with cross-border bank failures; bonus caps; exit from quantitative easing (QE); and record low interest rates.

It is the latter two that pose the most immediate threat. Globally, public and private debts are higher than they were six years ago, and yield-hungry investors are snapping up pre-crisis style “covenant-lite” loans that offer borrowers little protection. “This looks like to me like 2007 all over again, but even worse,” Bill White, the former Bank for International Settlements chief economist who is celebrated for having spotted the crisis, warned earlier this month.

Mr Haldane had a similar message in June. “Let’s be clear, we have intentionally blown the biggest government bond bubble in history,” he said of the Bank’s £375bn QE programme. “That is where we are, so we need to be vigilant about the consequences of that bubble deflating more quickly than we might otherwise have wanted.”

Two-fifths of UK bank assets “would revalue immediately if global interest rates were to rise abruptly”, according to the Bank. Ten-year gilt yields have almost doubled since May, so it is a live issue.

On Wednesday, the Bank ordered a thorough review into “the vulnerability of borrowers and financial institutions to sharp upward movements in long-term interest rates”. Lenders appear to have hedged themselves but the Bank is worried about “potential amplification channels” – particularly through hedge funds – that might trigger another financial crunch.

This is a potential crisis not of the banks’ making. But they are alert to it. In a recent survey, the Bank found that risks posed by low interest rates had suddenly become a major threat. Just 8pc of lenders considered low rates a problem last year, but 24pc did in June.

Specifically, they were concerned that “artificially low interest rates are leading to over-inflated risky asset prices”. Politicians may be worrying about a house price bubble, but equally dangerous financial market bubbles may already have been blown.

The frustration for the banks is the constant pressure they face to insulate themselves against risks that are ultimately political, even if the root cause can be traced back to the financial crisis.

Lenders bleated for a couple of years about regulatory demands for more loss-absorbing capital but, having comprehensively lost the argument, they’ve kept quiet and got on with bolstering their balance sheets. Since 2008, UK banks have raised £150bn and – excluding the unresolved RBS problem – now have more than enough to protect the taxpayer.

Take Barclays, which is raising £12.8bn to meet the regulator’s latest demands. By the end of the exercise it will have about £50bn of equity capital, another £30bn of lower ranking capital, and £80bn of debt that can be written down under new “bail-in” rules.

By comparison, Nobel Prize-winning economist Robert Engle has calculated that Lehman Brothers would have survived had it had $ 48bn on top of its $ 26bn of core capital. That’s $ 74bn, or £46bn. Lehman’s balance sheet may have been a third the size of Barclays, but it was far riskier.

In other words, with £160bn, Barclays has more than enough loss-absorbancy to protect the taxpayer. Yet, no one really believes it could fail without state support.

In his valedictory remarks, Mr Tucker drew a comparison with the US. “I do not believe it would be possible for the President to persuade Congress to provide taxpayer money for solvency support,” he said. “I think they can do it now and I think they can do it on a global basis.” But Europe is different because legal wrangling continues, he observed.

The latest spanner in the works is Brussels’ plan to cap bonuses, which will only force up salaries and dismantle efforts to build functioning incentives again. The UK government is now challenging the plan in the courts.

Information sharing between regulators is a long way off but vital if a global bank collapses again. Countries are interpreting global regulatory rules differently, to give their banks a competitive advantage. Mark Carney, the Bank’s Governor and head of the global Financial Stability Board, made a plaintive request earlier this month for governments to “implement fully the internationally agreed policies”.

There is still much more the banks themselves could do – such as provisioning properly for hidden losses, dropping onerous collateral requirements on small business lending, and pledging to raise capital from retained earnings.

But the real work now needs to be done by the regulators and legislators – on international co-operation, striking global accords, and writing new laws, as well as containing the risk of a spike in “long-term interest rates” and exit from QE.

If there is another crisis looming, the banks won’t escape censure. The difference is, this time it won’t have been their fault.

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