Commentaries

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Defining financial stability

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By my count, the British government’s new paper setting out its plans for overhauling the banking industry mentions the words “financial stability” 141 times in its 147 pages. So it comes as some surprise that the document makes no attempt to define the phrase.

The paper talks at length about restoring, maintaining and protecting financial stability. Its main proposal is to create a Council for Financial Stability, to be chaired by the Chancellor. Meanwhile the Financial Services Authority is to be given explicit responsibility for maintaining the stability of the financial system rather than just regulating individual banks.

Bank of England already has a Financial Stability Objective, and has set up a Financial Stability Committee to worry about it. But at no point has anyone said what this actually means.

The Banking Act 2009, which passed into law earlier this year, is not much help. In a particularly fine example of circular bureaucratic logic, the description of the Financial Stability Objective says the Bank of England should “contribute to protecting and enhancing the stability of the financial systems of the United Kingdom”.

Is the ECB too cautious or too reckless?

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The European Central Bank has long been criticised for being too cautious in its response to the financial crisis. Didn’t the inflation hawks of Frankfurt raise rates in July last year just as the credit crunch was about to reach its climax? Despite their massive injections of liquidity into the money markets, Jean-Claude Trichet and his colleagues were pilloried as timorous clones of the Bundesbank for cutting rates too slowly and refusing to follow the Fed and the Bank of England into Quantitative Easing by buying government and corporate debt.

But after last week’s helicopter dump of a record 442 billion euros in liquidity in one-year lending on demand to banks at its 1.0 percent refi rate against a broad range of collateral, the bank suddenly stands accused by some critics of being more reckless than the Anglo-Saxon central banks.

Mervyn King’s uncomfortable sermon for the City

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Did Mervyn King miss his true vocation? Last night he compared the Bank of England to a church – with the Governor as the priest – as he took to the Mansion House pulpit to pour a rhetorical bucket of cold water over guests at the Lord Mayor’s banquet.

Headline writers predictably seized on King’s disagreement with Alistair Darling over Britain’s regulatory structure. But the more interesting section of his speech dealt with banks that pose a threat to the stability of the financial system.

from Neil Collins:

Brown’s bombshell for the Bank of England

You may not have heard of Adam Posen, but you hadn't heard of David "Danny" Blanchflower before the banking crisis. Posen is Blanchflower's replacement on the Bank of England's Monetary Policy Committee and, boy, does he have some strong views. Here he is before the US Congress three months ago, with some modest proposals.

The rest of us may struggle to come up with remedies for the current malaise, but Posen has no doubts. He calls his address "a proven framework to end the US banking crisis". His framework looks more like a cross to nail up bankers, owners and regulators, since he suggests firing the lot of them, wiping out the shareholders, and wholesale nationalisation. He is wonderfully free of self-doubt:

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