It’s a moonless night in October, 2008.
A hooded figure turns the corner of Threadneedle Street. It’s Fred Goodwin, head man of the languishing British bank, RBS. He glances behind him. No one’s there. With a sigh of relief he pulls open the heavy door and disappears into the warm welcoming light of the Bank of England.
Inside, the stone walls of the central bank are dimly illuminated by chandeliers, but the mood inside is anything but festive. A ring of gaunt faces tilt towards him, they are gathered around a dark table.
“Welcome,” says a booming voice emanating from Bank of England governor Mervyn King
“I wish it was under more auspicious circumstances,” replies Goodwin. He takes his place next to a crouched figure. It looks like Eric Daniels but Goodwin doesn’t dare steal a closer glance. Across the table he thinks he spies Gordon Brown and Hector Sants, but he can’t be sure. The light is playing tricks, and Goodwin hasn’t slept for days. He’s at the end of his tether, a man buffeted by markets.
“We’ve gathered here today,” King begins. “To make a pact — a pact that will shake the foundations of this Bank to its core, but will ensure our continued mutual survival.”
A round of applause sweeps the room. Goodwin leans into his mystery neighbor.
“Bagehot woud be proud,” he whispers.
—————————
Think it’s fiction?
On Wednesday, Mervyn King said the BoE is looking at the difference between bank funding costs and the Bank’s base rate when setting policy. Before the credit crunch, banks were able to raise new finance at interest rates close to the BoE-set rate. But the spread between the two has been rising since 2007.
The BoE rightly says that the banks’ cost of funding feeds into the wider economy by pushing up rates charged on mortgages and corporate loans. But explicitly linking monetary policy three years on from financial crisis to bank funding costs seems pretty noteworthy, and has suggested to some analysts that bank-friendly low rates may be here to stay for some time to come. It certainly suggests that Britain’s banks and monetary policy remain firmly — and perhaps somewhat uncomfortably — entwined.
Elsewhere in Europe, a certain bank-regulatory ‘reciprocity’ appears even more obvious, but for very different reasons. Writing in Wednesday’s Wall Street Journal, Timo Soini, the leader of the Finnish political party poised to pose hefty political risk to the Portuguese bailout — makes the point:
“… A symbiosis has developed between politicians and banks: Our political leaders borrow ever more money to pay off the banks, which return the favor by lending ever more money back to our governments. In a true market economy, bad choices get penalized. Instead of accepting losses on unsound investments—which would have led to the probable collapse of some banks—it was decided to transfer the losses to taxpayers via loans, guarantees and opaque constructs such as the European Financial Stability Fund … “
Now imagine what those secret bank meetings might have looked like…
Related links:
Playing collateral games with the Portugal bailout - FT Alphaville
Mervyn King: from Bagehot to Basel, and back again - London Banker
Back to (bank) bondage - FT Alphaville