Newspaper article The Evening Standard (London, England)

Grave Danger of Bank Rescues

Newspaper article The Evening Standard (London, England)

Grave Danger of Bank Rescues

Article excerpt

Byline: ANTHONY HILTON

IT ALWAYS used to be believed that London's position as an international financial centre would not come under serious challenge as long as government avoided ill thought-out changes in taxation and regulation. Given London's success and importance, neither of these was likely, so the City was secure.

Unfortunately, this complacency of just a few years ago now looks dangerously misplaced. We have seen ample evidence in the past 12 months of the Government's ability to use the tax system to cause maximum uncertainty for minimum benefit. Who knows what long-term damage may eventually be done to the City by the non-dom and capital gains tax changes, to say nothing of the perverse incentives for multinationals to relocate offshore? What we do know is that London's reputation has been damaged and the confidence of overseas participants undermined.

If one own goal is seen to be good in Westminster, then two is clearly better, so now it is the turn of regulation.

Today sees the close of consultation on the Government's proposals to change the law to deal with the next Northern Rock the creation of a Special Resolution Regime, which would give the authorities unprecedented powers to move in and take over a bank they think may be about to fail. And so rushed and badly thought-through are its ideas that if they come into law without massive amendment, they could be as damaging to London's image as Sarbanes-Oxley has been to New York.

Part of the problem is motivation.

Everyone accepts that Northern Rock highlighted flaws in the current system that could usefully be rectified. The difficulty is that the case for saving a bank arises only if it poses systemic risk; if its failure will cause contagion which will bring failure in others. It is not right to rescue everyone willy-nilly because if banks seriously think they will get bailed out no matter what, they have no incentive to behave sensibly.

However, it is difficult in advance to know what is likely to be systemic, which makes it all the more astonishing that this legislation could be brought in, ostensibly to reduce systemic risk, without any attempt to define or debate what it is.

Except that it is not astonishing if you take the view that concerns about threats to the system are merely a figleaf, and what Government is really concerned about is avoiding political risk the embarrassment that comes from television pictures of voters queuing in the streets in Labour heartlands to rescue their life savings. It is too easy to believe that the real driver for the legislation, and the haste with which it is being pushed through, is that this must never be seen on television again, and certainly not between now and the next election. …

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