Mon Oct 28th, 2013 at 01:09:51 AM EST
The UK at the heart of a renewed globalisation
Mark Carney, Governor of the Bank of England gave a speech linked above at an event to celebrate the 125th anniversary of the Financial Times, London, 24 October 2013. Perry Mehrling posted that speech and a Bloomberg article (see below) about the Federal Reserve's proposal on his Money and Banking discussion forum, asking for discussion. My response is below:
It seems like both the Fed and the BoE are planing to significantly increase capital reserves well ahead of current Basel III deadlines. This will put pressure on the EMU banks and on European national central banks that have been resisting such increases, as they are far below even the current US and UK reserve requirements. Paris and Berlin will likely complain, with some justification, that they have different systems and should not be held to the same requirements. What will Spain, Greece, Portugal, Italy and Ireland do and how can they comply? The periphery has trouble complying with the current requirements and the ECB is hamstrung by Germany when it comes to helping them and is not a true central bank to begin with. Nor is there a real EMU wide fiscal authority.
Mark Carney of the BoE made by far the most significant and revealing claims. In effect, he proposes to make the BoE the dealer of last resort for banks and market makers operating in the UK, very much like what Perry Mehrling has proposed and described, in this case with unlimited support in British pounds and significant standing swap agreements with other foreign central banks for other major currencies, including soon the Chinese Renminbi. To me the clear implication is that such backstop would be provided to UK domiciled branches of foreign banks, perhaps via the BoE discount window, but it is hard enough to parse Fed statements, let alone BoE statements.
To me the revealing part consisted of the following:
"And in times of actual or prospective stressed conditions we stand ready to provide cheap, plentiful money through more frequent auctions."
"Cheap, plentiful money" seems a large step beyond Bagehot's "Lend freely at a high rate against good collateral." It sounds like in times of stress there will be QE for the world. Of course the current overnight rate from the BoE is 0.5%, so the "cheap" money commitment seems more like forward guidance. To me this indicates that the BoE are still flummoxed at their inability to increase economic activity through the monetary policies available to the central bank, and, of course, they are saddled with the gratuitous 'austerity' program of the current Tory/LibDem Coalition. Given the dependence of the British economy on the financial sector the prospect of the global economy slipping into deflation must surely terrify the BoE, if not George Osborne. David Cameron might not know enough to be terrified.
It will be interesting to see how the proposed policy for resolving failed international banks will develop. That has to be the most difficult part of all. The other shoe to drop will be how the implicit extension of regulation by the BoE to non-Bank market makers unfolds. Will this require action by Parliament and will such action be forthcoming?
Criticisms and additional thoughts are appreciated.
Fed Liquidity Proposal Seen Trading Safety for Costlier Credit Bloomberg
A proposal to make U.S. banks maintain 30-day war chests in case of a credit crisis is certain to add to borrowing costs, said a former leader of the global group that conceived of the standard. Stefan Walter, who was secretary general of the Basel Committee on Banking Supervision when it approved an initial version of yesterday's Federal Reserve proposal, said U.S. regulators have continued their tough interpretations of Basel III rules.
"The proposed rule would, for the first time in the United States, put in place a quantitative liquidity requirement that would foster a more resilient and safer financial system," Fed Chairman Ben Bernanke said before the vote.
"Nothing is free," said Walter, now a principal at Ernst & Young LLP, in an interview. "Buying more resilience in normal and good times means that liquidity will be priced-in more than before, and that will have a certain degree of impact on the cost of credit. That's the obvious trade-off."
I am of the impression that the Fed can impose its new rule after the 90 day period for comments. I don't know about the degree of freedom of the BoE. The Fed has already raised the capital reserve requirements for the largest banks to 6% as of June, 2013 and this goes quite a ways further. It will be interesting to see the response of Germany, France and the ECB.
From the Bloomberg article:
"This move by the U.S. highlights the different emphasis on either side of the Atlantic about the best way to underpin financial stability," Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland, said in an e-mail. "It serves as a reminder that there are limits to regulatory convergence given the underlying differences in financial structure and economic circumstances."