More Project Merlin Infighting Back Story, and the Collision to Come

By Richard Smith

Well, if you are inclined to believe them (confirmation bias alert) the latest London rumours about the infighting that accompanied Project Merlin (h/t @creditplumber) certainly dispel any doubts about the Treasury’s bank-favouring attempt to meddle with the Independent Banking Commission:

The Government offered to emasculate the Independent Commission on Banking as it tried to strike a deal on bank bonuses a few weeks ago.

That Merlin spin is finally being decoded with some precision in the mainstream media:

The row emerged in the last few days of frenzied negotiations around Project Merlin early in the New Year. A key objective of Merlin from the perspective of the banks taking part was to normalise relations between them and the Government. Thus the impression created by both sides was that the main area of discussion was bonuses and lending to small businesses.

It has now emerged, however, that the chief reason the banks took part was to lift the threat that Vickers’s commission would recommend a major restructuring of the banking industry which would have the potential fundamentally to alter how they do business and where they make their money.

The banks involved – Barclays, HSBC, Lloyds, RBS and Santander – were particularly anxious to avoid High Street banking being separated from investment banking, or a similar requirement which would force them to choose between acting as an agent for clients wishing to gain access to the markets or as a principal dealing on their own account in those markets.

A sufficiently cynical commentator could read that straight out of the Merlin press release a couple of weeks ago; and, if you’ll excuse the chest thumping, I did:

The other bullet points I wanted to revisit are these two:

  • promoting a strong and proportionate regulatory system, securing international agreement where appropriate;
  • implementing and applying European and international rules to create a level playing field in both policy and practice whilst protecting and maintaining the particular strength of UK financial services, and without pre-judging the outcome of the Independent Commission on Banking (IBC).

Well, I interpret “strong and proportionate regulatory system” as “not breaking up any more UK banks”; and “implementing and applying European and international rules” as “just sticking to whatever comes out of Basel III and not doing anything more radical”. “International agreement” is pabulum: it just means “not frightening foreign banks away by regulating heavily”. Then “without pre-judging the outcome of the Independent Commission on Banking (IBC)”, which will indeed be considering more radical reforms, is just an attempt by the Treasury to pretend they didn’t just say what they just said.

These latest stories are just rumours (though the veteran Anthony Hilton is about as well-connected and reliable a gossip as one could find in the British financial press), but of course they do tend to validate the speculation at this blog about why Project Merlin turned out the way it did.

Gratifyingly, the story also validates an optimistic assessment of the fighting spirit of the IBC members. The Government was sent packing, despite a determined push:

…it backed off only when Sir John Vickers, chairman of the inquiry, and his entire committee, Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf threatened to resign.

Good stuff, chaps.

Upshot: in the red corner, we have the entire IBC, Bank of England Chairman Mervyn King (just try to imagine Bernanke saying this sort of thing), BoE Deputy Chairman Paul Tucker, BoE Director Andrew Haldane, and FSA Chairman Adair Turner all calling for radical moves in bank regulation. In the blue corner, we have George Osborne and some banks. The IBC reports in September, so unless the battle really flares up and goes public before then, there will be plenty more ferrets-in-a-sack action to come.

Jaded Americans should reflect: if the UK regulators actually do produce radical changes, and make them stick, and they work, that will be a living reproach both to reregulation so far (Dodd-Frank and Basel III), and to your current political and legislative processes. That’s a lot of ‘ifs’, but success would make it a little bit harder to sustain the bank-favouring line that has prevailed in the US. So you do have a dog in this one last fight, too (and incidentally I suspect Tim Geithner knows this; we’ll see what he gets up to next).

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  1. George999x

    “if the UK regulators actually do produce radical changes…”

    Holding one’s breath not advised!

    1. Richard Smith

      Indeed not: on past form,that’s the fast track to asphyxia.
      Keep breathing, and cross fingers, is my tip.

  2. olddeadmeat

    Fingers crossed for the Brits.

    We desperately need someone to lead a real reform effort, both nationally and internationally.

    Maybe if the Irish public and its newly elected leaders give the finger to the EU and its banks…we could find someone with cojones enough here to do the same to our banks.

    We someone as independent as Ross Perot appeared to be, but, you know, sane.

  3. Francois T

    The newly elected Irish government could do a lot to help in reforming the banking system. All they have to do is to properly warn their people that if they’re willing to grind their teeth for a couple of years, (be ready for the consequences of a default) renegotiation of the debt would be a jack rabbit multiple punch in the face of the big banks, as well as a way to dramatically shorten the current economic slump.

    The core truth of this whole affair is quite simple: Euro banks are terrified of a Irish government renegading the debt.

    Would secure and relaxed people say things like this?

    neither the two European leaders nor the European Central Bank or EU will permit any substantial changes, despite the huge popular Irish revolt against the bailout.

    Chancellor Merkel will tell Mr Kenny that if he wants to reduce the high, punitive 5.8 per cent interest rate charged on EU loans then Ireland will have to give up its low corporate tax rates – a measure regarded as vital to Ireland’s recovery and one of the few economic policies it has not yet handed over to Brussels or Frankfurt.

    And, of course, Mutually Assured Destruction:

    The new Irish premier will also be warned that there is no question of forcing privately-owned financial institutions to assume Ireland’s £85 billion bank debts because the resulting market panic would spread to Germany and France, tearing the euro single currency apart.

    As Irish voters headed for the polling booths on Friday, the European Commission bluntly declared that the terms of the EU-IMF bailout “must be applied” whatever the will of Ireland’s people or regardless of any change of government.

    “It’s an agreement between the EU and the Republic of Ireland, it’s not an agreement between an institution and a particular government,” said a Brussels spokesman.

    A European diplomat, from a large eurozone country, told The Sunday Telegraph that “the more the Irish make a big deal about renegotiation in public, the more attitudes will harden“.

    It is not even take it or leave it. It’s done. Ireland’s only role in this now is to implement the programme agreed with the EU, IMF and European Central Bank. Irish voters are not a party in this process, whatever they have been told,” said the diplomat

    Fighting words they may come to bitterly regret.

      1. Paul Repstock

        The ruled always have one ultimate choice, ‘whether or not they will submit?’ The people of Iceland (though in a somewhat different/worse position), chose not to submit. I’m certain the International community (banker driven), will make them suffer for that. However, they made the proper choice. I hope ordinary people can find some ay to help them.

        On a related note, as I pointed out earlier, the UK banks now own 10 Downing. With ‘public’ ownerships, like 40% of Lloyds and other leverages, the government of Britain has cast their lot.

    1. ChrisPacific

      Re: “Irish voters are not a party in this process, whatever they have been told”

      Against a backdrop of current events in Tunisia, Egypt, Libya, and Yemen, this strikes me as an incredibly foolish statement to make. No wonder it was anonymous.

      1. ScottS

        Indeed. They had to keep voting on the Lisbon Treaty until they got the “right” answer.

        I’m starting to understand what I’ve seen on this blog several times in the past — that Europe is not fond of democracy.

        1. Paul Repstock

          Not true Scott. I think Europe is very fond of democracy. It is the bureacratic machinery within the various governments which through their control of the European Union, have created a Monster in their own image.

          Nigel Farage has qite a lot to say about this. Sadly, he is one of very few public voices.

  4. Ian Fraser

    Amazing. I hadn’t read the Anthony Hilton piece, so I learned about this for first time here. Those who say “don’t hold your breath” are wrong. As you say, Richard, the UK now has a real chance to lead the (developed) world for sensible bank reform, and whilst I am not “optimistic” I believe that King and his circle, and Vickers and his circle are willing to take it. As Martin Wolf and Andy Haldane have repeatedly said, we cannot afford another crisis, and if the implicit guarantee for TBTF banks remains in place, we will.

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