Bankers and regulators remember everything and learn nothing

You can make any rules you like, but a bank cannot keep 100% cash to pay out every depositor, should they decide to take their money out simultaneously while lending and investing simultaneously. It does not work. 

I sit on the board of a bank, a lending company owned by a bank and a crypto investment firm. And I must say the waves of market fear – borderline panic – over the last few days have been exceptional. 

Apparently, hi-tech military hardware and software meant we only needed a handful of soldiers on the ground, this time supplemented by special forces. As an ex-soldier, this was, to my mind, always nonsense.

Matched only, in fact, by the BBC getting itself into a moral tangle over the Lineker debacle. Former and current footballers with a clear moral view can run rings around the Oxbridge-educated types who run the BBC, the government and the regulators, who cannot see moral hazard, even as they create it.

The mostly well-heeled venture capital clients of a bank like SVB are always in favour of privatising gains, removing red tape, and expounding libertine market values as long as they are winning.

When the fertilizer hits the windmill, they suddenly see themselves as strategically important to the state, deserving of special treatment and preservation orders through the socialising of losses. The irony of this contradiction is of no relevance when the ship needs to be saved from sinking.

To misquote Talleyrand, the late French diplomat,  bankers, and regulators remember everything and learn nothing. No bank or financial institution can withstand a full-scale run on deposits. The trick, which always eventually fails, is to try and keep lending fluid, and risk under control. 

There is a cycle in all of this. Banks lend, businesses grow, banks lend more and extend their balance sheet, and derivative specialists create all kinds of specialist lending – mostly highly leveraged and high risk but made to look sanguine so the lending bubble can keep growing. 

Market sentiment changes; it always does. The banks call in the loans to meet the requests from wary depositors. The loans can’t be paid back, the bank doesn’t have sufficient capital to pay back the depositors It tries to borrow to make up the difference. The depositors panic, the bank collapses, and at a minute to midnight, the Government steps in, socializes the losses and underwrites all the deposits.

All this is usually followed by a heavyweight inquiry which concludes that the banks must hold far more safe deposits – like cash and government debt – and not lend too much. 

This results in the growth of the economy is slow or even negative. The banks and venture capitalists say all those rules are a weight on growth, so they gradually get eased, and the process starts all over again.

What is even more frustrating is that the regulators are even worse than the generals in preparing for the next war, based on the experience of the last one. 

Apparently, hi-tech military hardware and software meant we only needed a handful of soldiers on the ground, this time supplemented by special forces. 

As an ex-soldier, this was, to my mind, always nonsense. You cannot hold a large land area with AI, a smart computer and the SAS. You need thousands of soldiers on the ground. The Russian invasion of Ukraine has taught us all this lesson again. Welcome back conscription, perhaps?

The Maginot line built by the French after WWI didn’t work in WWII. The Germans just went around it and through the gaps. This metaphor is appropriate for banking regulation. It’s fighting the last crisis not the next one. 

The key problem is that the damage is always the same, but the attack manifests itself differently. If you plan to defend a hit to the front of your head, you will surely not be prepared for a hit to the back.

There is no simple solution to all this. But some guidelines could be followed.

Banks could be allowed a broader base of investments and not just Treasuries marked to market, or, quite likely, marked to madness. Should a run occur, then the government that owes the debt could guarantee that sales at a stressed market price will see the difference honoured at a future maturity date. This hurts everyone a bit, but takes the heat out of a situation.

You also need to ensure that bank traders and aggressive lenders actually suffer from the consequences of Moral Hazard. 

If they lend money they don’t own, to get commissions for themselves, but cause a problem, they ought to pay back all the losses and/or face penal consequences. This would be far more effective, to my mind, than using stringent capital rules, which go on to be circumvented by clever derivative structures.

And perhaps customer payrolls should be kept safe, while the personal assets of its shareholders are temporarily frozen. I can hear the howls of dissent even as I write this sentence. 

What I am getting at in all of this is that we need to find a way to hurt the over-aggressive lenders and borrowers. Otherwise, the system is doomed to continue its boom and bust cycle until the end of time.

Meantime, it’s Gary Lineker 1 BBC 0. Yellow Card for the Director General and probable Red Card for the Chairman. 

And, if you are in doubt, we have just seen another Government bailout of a specialist part of the banking system, masquerading as a market-based solution. 

I’m talking about HSBC’s decision, late on a Sunday, that buying the UK arm of SVB for £1 would be a well-thought-out decision. Ironically, it probably is.

Ian Morley is chairman of Wentworth Hall Family Office


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