Another Attempt at Outflanking Mervyn King – this time, by the UK Treasury

We posted last week about the NYT’s smear of Mervyn King (as did London Banker), and followed that up with some observations on the UK Chancellor’s dreary capitulation to the banks, aka “Project Merlin”; we concluded somewhat world-wearily by promising more sightings of attempts to nobble the UK’s radical bank reformers.

Well, here’s the first, from Bloomberg:

Bank of England Governor Mervyn King may not get the chance to exercise new powers over banks under legislation to be introduced later this year by Chancellor of the Exchequer George Osborne.

Osborne’s bill abolishing the U.K.’s financial regulator and handing most of its authority to the central bank in London is due to take effect in 2013 as King’s second five-year term as governor expires.

The almost three-year-long process stems from the need to consult industry and lawmakers, Treasury spokesman said. The timetable reflects differing views between King and the government on issues including the amount of capital banks should hold, said three people familiar with the matter who declined to be identified because the issue hasn’t been made public. The Bank of England declined to comment.

“For something the government said was so important, they are not treating as if it is. It seems very strange,” said Steven Fielding, a professor at the Center for British Politics at Nottingham University. “Unless there is some kind of other reason, it’s very surprising.”

Of course your humble blogger is not at all surprised, and after last week’s trailer, I doubt if this blog’s readers are, either: we know why this is happening.

Let’s say the process of rethinking bank regulation started in earnest in March ’09. Two years later, we have Dodd-Frank and Basel III. Admittedly, both are dog’s breakfasts, but why, pray, is is going to take three more years of consultation with representatives of four big banks (HSBC,Lloyds-HBOS, RBS, Santander), and a bunch of tiddlers, to get our super-duper UK banking regulation sorted out?

It’s a simple enough subterfuge, isn’t it? Just drag out the process so long that King is off the scene before some watered-down version of the bank reforms comes into effect.

It’s still hard to see how this bit of deviousness can possibly work out as intended, given the depth of support for radical bank reform ideas at the BoE. But if we see the likes of Tuckey, Haldane and Miles somehow pushed quietly to the sidelines along with King, then you can start to pencil in a complete triumph of the bankers.

I imagine some or all of the reformers will be making some public noise, before it comes to that. If the government even lasts that long.

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  1. Deus-DJ

    No, the problem is capitulation. There is always going to be conflict…acting like we should all just get along and that conflict is inherently bad is the problem.

      1. F. Beard

        how do you put an image into your avatar? Deus-DJ

        Go to and upload an image for your avatar.

  2. Richard

    Actually, the issue of how much capital banks should hold is almost over.

    Yesterday, an article appeared in the American Banker discussing the issue of capital at banks and how it should be measured.

    Then, Jamie Dimon observed how in 12 months the US banking industry will be overcapitalized.

    We know that the Treasury and Fed are running a stress test where the conclusion is already in: The Too Big to Fail have plenty of capital and they can resume paying dividends.

    In the UK, the banks will scream that they need a level playing field in terms of equity requirements with US banks to be competitive otherwise they will have to leave. Naturally, their regulators will have to cave in.

    Bottom line: Raising bank capital is no longer on the table and it would be convenient if Mervyn King never brought it up again.

    1. Richard Smith

      Well I expect you are right about the likelihood of capital increases in excess of what Basel III ends up asking for (and Miles would like a *lot* more).

      Even without that, though, the “funding model” and “industry structure” aspects of King’s proposals would still be worth holding out for.

      1. Richard

        While I agree with you, the banking industry clearly does not. Hence the reason they would like to see Mr. King pushed to the sidelines.

        Personally, I wished that Mr. King has chosen his fight more carefully. The whole fight over capital assumes that bank assets are properly valued. An assumption that few would think is accurate since the beginning of the credit crisis in 2007.

        Mr. King realized at the start of the crisis that there was a problem valuing assets. The question is why were these assets difficult to value.

        Yves and you have done a terrific job of answering this question by highlighting how the necessary asset level data is unavailable.

        Had Mr. King chosen to fight for disclosure, he would have been well supported because requiring disclosure is the traditional role for government and its regulators.

  3. Roy @ Work from Home

    Surely this is just more of the same. Governments will continue bailing out banks and banks will continue engaging in risky activities as there is not real perceived risk of failure and a huge appetite for profits. The coverup called impending regulation is exactly that.

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