Money Supply

Hello and welcome to the Bank of England’s press conference on its Financial Stability Report.

The governor will be joined by Adair Turner, chair of the Financial Services Authority; Paul Tucker, deputy governor for financial stability; Andrew Bailey, soon to become head of the FSA’s  Prudential Business Unit; and Andrew Haldane, executive director for financial stability.

Expect a raft of questions on the Libor scandal and the eurozone crisis. 

All times are London time. 

11.54 This live blog is now closed.

11.53 Here are the key takeaways.

• Sir Mervyn has called for fundamental reform of the process by which Libor is set. Specifically, he wants Libor to represent the rate at which banks can actually borrow, rather than the rates at which they think they could borrow. This might sound blindingly obvious and no doubt makes a lot of sense. But it is a very significant change, nonetheless and would probably lead to Libor rising far higher during periods of financial stress such as the present.
• The governor stopped short of calling for a Leveson-style inquiry, however, saying that the Libor scandal merely highlighted the need for structural reform along the lines suggested by the Vickers commission, which wants commercial banks and investment banks to be separate entities, and very strong leadership.
• As expected, the Financial Policy Committee called for liquidity requirements to be relaxed. The FSA should issue guidance in the coming weeks. More shocking was the decision to call for banks to raise their capital levels.
• The governor didn’t say much on the Eurozone summit, though he would like the ECB to become the eurozone’s main banking supervisor. Lord Turner was more forthcoming, however, saying that last night’s statement was “a major step forward”.

11.30 The presser is now over. Key takeaways to follow.

11.30 It is clear that the governor thinks the question asked to Libor panellists is deeply flawed. Here is this question the British Bankers’ Association asks:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”

Note that it is the rate at which banks “could” borrow, rather than the rate at which they actually do borrow. Problems arise, however, in periods of financial stress when there is little interbank borrowing going on.

11.26 Interesting question from Larry Elliot of the Guardian about whether bankers are facing a backlash similar to the public reaction to some of the trade union tactics seen in the 1970s. “Do they just not get it?” The governor likes the question, but doesn’t want to say much on it. “I’d encourage you to write more about it,” Sir Mervyn says. Cop out!

11.17 This is interesting. Both Sir Mervyn and Lord Turner would welcome the European Central Bank becoming the eurozone’s banking supervisor.

“I personally would welcome having as an opppostive number the European Central Bank,” the governor says.  ”Having one overall supervisory authority that didn’t feel it had a strong political commitment to banks, but instead the stability of the financial system as a whole, might be better from our point of view. Personally I would find that a bit of a relief.” However, he then notes gloomily that a single banking supervisor isn’t germane to the main problems the eurozone is facing.

Lord Turner then breaks ranks with the governor (see 10.48) over keeping quiet about the eurozone summit and says that last night’s statement is a move in the right direction.”The possibility of recapitalising banks directly is a step forward,” he says, adding that “the words as written look like a major step forward” in recognising the reality of monetary union.

Lord Turner is “very supportive” that the eurozone’s supervisor should be the ECB.

11.07 Here’s the full Financial Stability Report.

11.01 FSA guidance on liquidity will come out in a matter of weeks, says Andy Haldane. He says banks’ liquidity buffers are currently in excess of half a trillion in sterling (or £500bn) , which he notes is greater than the stock of SME lending.

“Removal of regulation should make a big impact on SME lending in the UK,” Mr Haldane says. It’s nice to hear something a little more optimistic from a Bank official.

Adair Turner notes that the regulations will work better, the more central banks make clear that they are willing and able to provide liquidity to the banking system.

10.58 Libor is, unsurprisingly, dominating proceedings. Should there be criminal proceedings? The governor says its not for him to say. But he is of the view that incentives need to change, and that they will change once commercial banking and  investment banking is properly separated.

10.53 This is massively significant. The governor says that Libor can now longer be based on quotes on what banks might be able to borrow at, but actual transactions instead. That has huge implications.

Sir Mervyn acknowledges that this is  not simple or straightforward because there are questions about what you do about existing contracts, and what you do at times (such as the present) when market is so thin because banks refuse to lend to one another unsecured.

However, the governor says a change is now essential: “The view that ‘My word is my Libor’, is now dead.”

10.48 The governor is asked for his view on the Eurozone summit. He doesn’t say much, arguing that as the summit is still going on, it isn’t appropriate for him to give a “running commentary”.

That was a perfect opportunity for Sir Mervyn to say something positive on the eurozone, but he refused to do so.

10.45 Now to the questions. The first calls for a Leveson-style investigation into the banks.

The governor wastes no time in launching into some banker-bashing, lambasting “the culture and the structure” of the banking industry. Sir Mervyn slams the “deceitful manipulation” of Libor, which he notes is one of the most important interest rates.

The governor says that the scandal, along with the mis-selling of interest rate swaps to SMEs, highlights the need to legislate for the Vickers reforms, which split investment banking from retail banking. ”It is very clear now culture of investment and retail banking are completely different,” Sir Mervyn says. There also needs to be very strong leadership.

He doesn’t, however, think there needs to be an inquiry given that Vickers has already taken place.

10.38 The committee recommends that the FSA allows banks to use their liquidity buffers. The FSA should also consider adjustments to microprudential measures to allow for the fact that banks can access liquidity from the Bank of England, the governor says.

See 10.20 from how this measure may, or may not, help the banks and the economy.

10.35 Sir Mervyn says the outlook for financial stability has “deteriorated” because of the eurozone crisis.

Here is the first the policy recommendation.  The FPC recommends banks should temporarily raise their capital levels. “Sufficient cushions” for capital could be above Basel III standards, he says. Levels will be calculated by the FSA on a bank-by-bank basis. He says that this shouldn’t come at a cost to the real economy. We shall see.

Now to liquidity…

10.31 The governor and others take their seats.

10.30 Of course, one of the biggest stories at the moment is the Libor scandal. Expect Adair Turner — and possibly others too — to face questions on the matter during today’s presser.

The Bank isn’t handling the ongoing investigation into possible manipulation of the rate by other banks, and so don’t expect much on that from the governor. But the Sir Mervyn is not averse to banker-bashing and might take this as an opportunity to have a dig at Bob Diamond and others.

The Bank also relies on Libor to decide how much money to pump into markets. It will be interesting to see whether Sir Mervyn says anything about this, or whether the Bank believes there are implications from financial stability from the scandal.

10.20 The Financial Stability Report will feature the latest policy recommendations of the interim Financial Policy Committee.

Recent comments by the governor and Paul Tuckersuggest that the FPC could recommend a relaxation of liquidity requirements. Both the governor and Mr Tucker have argued that UK and global requirements are hampering lending to the real economy. Andy Haldane has been saying this since last summer. But would relaxing the requirements help?

Richard Barwell of RBS isn’t convinced.

Richard Barwell, RBS: It makes sense to try. It is not socially efficient to encourage solvent banks to self insure against a liquidity panic on a grand scale when the central banks are willing to provide cheap funds. But I am not sure the policy change will have much impact.

If the governor is telling banks the outlook is grim then isn’t it rational for banks to hunker down rather than expand their loan books. Bankers may also be nervous about accepting the governor’s invitation to run down liquidity buffers now whilst emergency support is available when they know sooner or later that support will be withdrawn and there will be pressure to build buffers again. And even if bankers are happy to go along with it, investors may not like the look of banks moving in the opposite direction to where they are supposed to be heading. 

10.15 Hello and welcome to the live blog. The presser is due to begin at 10.30am. Before that we’ll be blogging on what to expect.