Most of my working day is spent scuttling between sombre conferences on Central Banking best practice and meeting city economists to get their instant reaction to economic developments.
So when an opportunity came recently to travel to Basel in Switzerland to cover the latest announcement from the committee which aims to create a new framework for banking regulation, I leapt at the chance. But my delight at getting a free trip shouldn’t mask the fact that developments in the scenic Swiss city should be a cause of great concern for the government.
The latest proposals merely restore the status quo which led to the credit crunch.
The measures state that banks must hold liquid assets over a 30 day period of at least 60% of their anticipated net cash outflows.
But it’s not with this number that the problem arises.
Rather it’s the definition of ‘liquid assets’ which should be of concern.
The initial proposals from the Basel committee argued that only cash, government bonds and a limited range of corporate bonds should count as truly ‘liquid’ i.e. easily and quickly convertible into cash.
These assets have the advantage of being relatively ‘safe’ investments, but offering a comparatively low rate of return, and so risk thirsty banks do not wish to be overly exposed to them.
Since the initial proposals were announced, the major banks have delivered a massive lobbying operation. Now the proposals have been altered to allow certain company shares, a wider range of corporate bonds (including those with an official credit rating of as low as BBB) and most oddly of all, mortgage-backed securities, also to be seen as ‘liquid’ assets in the eyes of the Basel committee.
It was the fact that the financial system lost faith in the value of these mortgage-backed securities in 2008 that resulted in the credit crunch.
Banks won’t ever lose faith in cash, and sovereign debt will usually find a market.
But mortgage-backed securities are assets which are entirely reliant for their value on the housing market. The collapse of this market has arguably been responsible for most British recessions since the war. If these proposals are enacted, they would ensure that any future recession caused by falling house prices would be necessarily accompanied by a credit crunch, as banks would have to reduce their lending to comply with these rules. This would restrict the options available to the government of the day with regard to combating a recession.
Independent central banks are a vital component of the economy, as they can take decisions based entirely around the economic cycle rather than the electoral cycle. But a major problem is that central banks are staffed by people who have an inherent bias towards believing in the wizardry of the senior staff in the commercial banks, as they are likely to have studied at the same institutions and read the same books and garnered the same qualifications.
Governments should not however be blinded by any such belief. The latest proposals from the Basel committee are bad for banking, and bad for Britain. They should be resisted by all means available to the coalition.
* David Thorpe is a member of the Liberal Democrats in Newham, and works for an economics publication.