The Dangers Posed By Rising Interest Rates

The Bank of England's Financial Stability reports arises a red flag about the dangers from a rise in interest rates.

The Executive Summary notes:

"In the near term, risks could crystallise if global long-term interest rates were to rise abruptly from current still historically low levels.."

Hidden away in the report itself, the Bank notes that:

"The impact of higher global interest rates on borrowers will depend on the cause of the increase....a significant cohort of UK borrowers could experience financial difficulties if interest rates were to rise during a period of subdued income growth.."

Will interest rates rise?

Sir Mervyn King, thinks not (not at least in the foreseeable future).

Farewell Sir Mervyn

Sir Mervyn King is giving evidence to the Commons Treasury committee for the last time as governor of the Bank of England.

During his valedictory appearance he hinted that Jane Austen will appear on future £10 notes, he also welcomed the responsibility for bank supervision being returned to the Bank of England.

He is no fan of austerity for countries with no other means of promoting growth, and noted that it had been a disaster for those countries; in the meantime QE in the UK, in his opinion, will continue to run for the foreseeable future as will the current low levels of interest rates.

Basel III - Kicking The Can Down The Road?

Banks have been given several years to meet new rules governing the amount of liquid assets they must hold on their books to see them through a short-term market crash.

The Basel Committee on Bank Supervision has stated that banks would only need to have 60% of the necessary short-term funding in place when the rules become effective in January 2015, and would have until 2019 to fully implement the liquidity coverage ratio (LCR).

The new rules also widen the range of assets that banks can put in the buffer; these now include shares and retail mortgage-backed securities (RMBS), as well as lower rated company bonds. Despite the fact that these can only be included at a hefty discount, this is an indication that the Committee recognises that there are problems within the banks' balance sheets.

The rationale for this easing of the rules was explained by Sir Mervyn King, who told the Telegraph that it had decided to opt for a “graduated approach” to avoid “disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity”.

In other words the Committee was worried that the rules would knock any nascent recovery for six. As to whether this slackening of rules actually helps banks and the global economy recover, or simply kicks the can further down the road, remains to be seen.

Mark Carney Named As Governor of The Bank of England

Mark Carney, the Governor of the Bank of Canada, has been named the new Governor of the Bank of England.

He will take over from Sir Mervyn King next June.

Mervyn King Chides US Authorities

Mervyn King is less than impressed with the US over its "shoot first, ask questions later" approach to financial regulation, wrt dragging Standard Chartered through the mire of public opinion before even completing its investigation.

King is quoted in Boston.com:

"I think all that the U.K. authorities would ask is that various regulatory bodies that are investigating a particular case try to work together and refrain from making too many public statements until the investigation is completed."

King is too polite to say that this is in fact a trade war between the US and UK.

King Denies Fed Warning

In the understatement of the decade, Mervyn King (Governor of The Bank of England) has told the Treasury Committee that there needs to be change of culture at Barclays.

"Barclays has to create a new bank with a new culture to take it forward."

He also denied that the Fed had warned the Bank of England that Libor was being manipulated:

"If the Fed had regulatory concerns they would have shared that with the regulator, [not the Bank of England].

They didn't pass any information to us that Libor was being manipulated.

The Fed could have shared that with us and they did not, all we would have done was pass it on. The Fed is a regulator, we were not; the Fed asked us for advice on how to interact with the BBA."

This denial is rather odd given the following:

"Writing to the head of the Bank of England, among others, Geithner made six recommendations, which included eliminating incentives that could encourage banks to manipulate the rate and establishing a “credible reporting procedure.” 

Not least the fact that King responded and thanked him for his recommendations.

Notwithstanding that apparent conflict between what King said and reality, his statement that the Bank of England was not the regulator may well be technically correct given the appalling tripartite system set up by Brown. However, it surely had more than a passing interest in what was going on with the banking system and, now that it will have "beefed up" powers, most certainly has an even greater "interest".

Whither Project Merlin? - Osborne's Maxed Out Plan A

Kudos to Mervyn King and George Osborne for gamely trying to shore up the British economy, against the oncoming Eurozone tsunami, with a £100BN support programme.

The FT reports that:

"the chancellor told a City audience on Thursday night that he was working with Sir Mervyn King, the Bank of England governor, to “deploy new firepower” amid fears that turmoil in the Eurozone could lead to a severe credit crunch and higher interest rates in Britain.

Mr Osborne’s aides spoke of a “maxing out of Plan A” – taking advantage of the country’s record of fiscal discipline and credibility with the markets to unleash an aggressive monetary policy offering cheaper loans to businesses and households."

The markets have reacted favourably (as they always do) to "hopeful" news.

This is all very well, if one could trust the banks to lend the money on to companies and individuals. However, all that the banks will do it use the £100BN to shore up their own balance sheets.

Not one penny of this will reach the business or individuals who need it, and would be the engines of growth for the British economy.

It would be better of Osborne took the £100BN and simply dropped it from a helicopter over the UK, that way he could be sure that it will have some positive effect on the economy.

Am I being too cynical?

I don't think so, have you all forgotten the hopes and hype wrt Project Merlin?

Whatever happened to that then?

Major Problems Ahead

The head of the Bank of England, Mervyn King, has said today that the Euro crisis is likely to get worse and that the UK and Bank of England are developing "contingency plans" to be implemented should the crisis spiral out of control.

He is quoted by Bloomberg:

"There are major problems ahead.

There are major credit losses to be realized. Whatever happens there will be difficulties ahead that will undoubtedly affect us."

Tin hats everyone!

King Rewrites History

Sir Mervyn King, Governor of The Bank of England, has stirred up a hornets nest after his recent BBC radio lecture in which he rewrote history and his/the Bank's role in the financial crisis.

Amongst other things, King said that the Bank would be very happy to co-operate with another inquiry into the collapse of Northern Rock (the bank that the Bank of England refused to bailout).

This willingness to co-operate rather took the breath away of Andew Tyrie, chairman of the Treasury Select Committee, who said that the Bank "should get on with it at the first available opportunity".

Others on the Select Committee expressed astonishment at the Governor's comments, given that the Committee has asked the Bank on numerous occasions to co-operate with an inquiry only to have their requests refused. The Bank remains the only member of the tri-partite system not to have published a review into its role in the crisis.