Trust versus Confidence?

an ATOMISER of the traditional kind.
Andy Haldane, the Bank of England’s head of financial stability, says enduring recovery depends on trust being restored to the financial system, and called for smaller and more diverse banks, and a return to mutuality. This may be a bit of a slap to the FSA for placing high hurdles in the path of a couple of dozen or so new banks seeking to form in UK o register branches or subsidiaries in the UK. Many banks want to do more to gather in retail deposits and the UK is a good place for that including the UK’s liabilities guarantee regime. Haldane attributes the slump in economy & credit in the financial system to a loss of trust between banks and households, among banks and between banks and investors over the past two years. “Loss of confidence” is perhaps a soft phrase for disdain, hatred and deep suspicion. “It is lack of trust – and hence credit – that may shape the recovery. Based on past evidence . . . we might anticipate a protracted period of repair,” he told his business audience in Leeds.
Recovery from past recessions in the UK, trust and credit for non-financial companies recovered well once the economy had started to grow. Actually there was always usually a 6 month delay before banks started to expand credit and trust in recovery. In the immediate future, Haldane accepts that trust in the financial sector has been substituted for by govrnment guarantees (insurance paid for by the banks) plus state intervention measures. He says, “Extending public sector credit on this scale relies on the deep pockets and prudence of our grandchildren. It can be no more than a stop-gap – a temporary bridge – until private sector trust can be restored.” I take issue with this. I expct the government’s measures to be highly profitable for taxpayers. Moreover, the vast bulk (let’s say all of it) is in fact off-budget (swapping short term treasuries for bank assets after large discount + fees) and therefore not involving taxpayers’ money. Taxpayers are exposed only via the fiscal deficit, hich I expect the profit on bank aid to recover at least 40% of.
He also called on banks to seek to rebuild trust in their activities without regulatory intervention, by insisting that banking should not be commoditised like car manufacture, and pressed the case for smaller, more local banks, pursuing diverse strategies. An examination of FDIC data on US 8,400 small banks may put this idea into perspective; just parcelling risk out ino smallest chunks (like how Lloyds of London disperses underwriting risk). Haldane says,
“If large-scale processing of loans risks economising on the collection of information, there might even be diseconomies of scale in banking. . . Within the space of a decade, banks went from monogamy to speed-dating and that big was not best.” He called for a return to greater mutuality in financial services to prevent shareholders pressing for too much risk-taking in the knowledge that taxpayers would stand behind losses. This is an attack on the FSA for having encouraged de-mutualisation on the basis that the market knows best how to value banks, and ensures banks can raise capital – a fine idea in mico-prudential terms, but not much good in a macro-prudential crisis. “I am happy to say that reports of the death of the building society sector are greatly exaggerated. Indeed, mutuality may do a better job of aligning stakeholder incentives than some alternative forms of corporate governance”, i.e. better than shareholders, but begs the question how do stakeholders or shareholders actually challnge excutive boards. Company La needs major changes in shareholder voting process and information rights and similarly in mutual society member comparable rights.
Alongside banks rebuilding trust in their own abilities, he said that a return of credit – which comes from the Latin word for trust – would also be helped by strict new regulations aiming to strengthen banks’ financial resources, their ability to spot and deal with severe risk including in their governance.
He argues that new regulations are unlikely to be the answer alone. “One reason why regulation might not be the whole answer is that trust in financial regulation is itself one of the casualties of crisis.” I think this is defeatist. The new Basel II Accord (FSA and CEBS responsibility at law) has hardly touched down. We need to give it more time to discharge all of its responsibilities onto the banks. Haldane says there is a difference between confidence, which he said had returned to the business world, and trust, “an altogether different animal”. “Moral compasses take rather longer to self-correct than magnetic ones. This has implications for the path of recovery in the period ahead.”
Lord Turner has had as much, in fact much moe to say recently, and thereby restored some trust in the FSA’s efficacy. The Bank of England by denigrating he role of regulation does not look as if it wants to embrace the FSA’s role and thereby end the UK’s tripartite regulatory system.