A couple weeks in, the FPC is ALREADY calling for "drastic reform"

Bank of England’s Andy Haldane calls 'em like he sees ‘em.

It seems a bit odd for one of the key figures in the UK’s newly installed financial regulatory structure to be calling for drastic reform of bank regulation already, but the Bank of England’s Andy Haldane seems to be calling them like he sees ‘em nonetheless.

Haldane is executive director of financial stability for the Bank’s Financial Policy Committee (FPC), the forward-looking systemic risk identifier created alongside the FCA and PRA as a result of 2012’s Financial Services act.

Given his position, it was interesting to hear him identify a “Byzantine” regulatory structure as a credible threat to the stability of the banking system, at a dinner held by the International Financial Law Review (IFLR) yesterday.

Complex regulation, he said, has only acted to the advantage of those with most resources to devote to exploiting gaps in the rules, arguing instead that “Simple measures of bank leverage, untainted by such complexity, were ten times better at predicting banking failure during the crisis than complex regulatory alternatives.”

Along with proposing a leverage ratio “north, possibly well north” of international requirements (a view that makes sense given Haldane’s work on the Basel committee), he suggested a “restructuring rule” facilitating simple wind-downs of banking operations, and a “resolution rule” governing restructuring, as the main building blocks of a stripped-down regulatory system.

Perhaps the most insightful back-to-basics comment made by Haldane this week, however, came at an event held the day before the IFLR dinner by the Federal Reserve Bank of Atlanta.

Speaking on the subject of executive bonuses, he built on comments made in January (regarding the proposed deferral of bonuses by ten years to encourage prudence) to suggest that debt, rather than equity, should make up the mainstay of management compensation structures.

“Equity can give strange incentives” to the management of banks in crisis, he argued, adding that during the financial crisis, “many big firms gambled for their resurrection when, if you look at how top management was remunerated, it was heavily in equity.”

Debt elements facing wipeout in the event of business failure, he explained, could act as a major counter to these “strange incentives” if built into pay structure, concluding that “more can and should be done to have those sorts of debt form a larger part of compensation structures.”

This approach – to look at the incentives that drive how banks behave, rather than creating a web of rules to restrict what is possible – feels very much in line with the current zeitgeist.

Steven D. Levitt, the economics world’s answer to Jeff Goldblum’s character in Jurassic Park, had this to say in the first chapter of bestselling pop-econ book Freakonomics:

“The typical economist believes the world has not yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme. His solution may not always be pretty -- it may involve coercion or exorbitant penalties or the violation of civil liberties -- but the original problem, rest assured, will be fixed. An incentive is a bullet, a lever, a key: an often tiny object with astonishing power to change a situation.”

With this in mind, it’s tempting to think that a creative look at executive remuneration, a subject which currently enrages a large slice of the world’s population, and which has been blamed for a lot of the misery to affect global markets since 2008, may be the tool capable of cutting the Gordian knot of post-crisis regulation.  

Photograph: Getty Images

By day, Fred Crawley is editor of Credit Today and Insolvency Today. By night, he reviews graphic novels for the New Statesman.

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Erdogan’s purge was too big and too organised to be a mere reaction to the failed coup

There is a specific word for the melancholy of Istanbul. The city is suffering a mighty bout of something like hüzün at the moment. 

Even at the worst of times Istanbul is a beautiful city, and the Bosphorus is a remarkable stretch of sea. Turks get very irritated if you call it a river. They are right. The Bosphorus has a life and energy that a river could never equal. Spend five minutes watching the Bosphorus and you can understand why Orhan Pamuk, Turkey’s Nobel laureate for literature, became fixated by it as he grew up, tracking the movements of the ocean-going vessels, the warships and the freighters as they steamed between Asia and Europe.

I went to an Ottoman palace on the Asian side of the Bosphorus, waiting to interview the former prime minister Ahmet Davu­toglu. He was pushed out of office two months ago by President Recep Tayyip Erdogan when he appeared to be too wedded to the clauses in the Turkish constitution which say that the prime minister is the head of government and the president is a ceremonial head of state. Erdogan was happy with that when he was prime minister. But now he’s president, he wants to change the constitution. If Erdogan can win the vote in parliament he will, in effect, be rubber-stamping the reality he has created since he became president. In the days since the attempted coup, no one has had any doubt about who is the power in the land.

 

City of melancholy

The view from the Ottoman palace was magnificent. Beneath a luscious, pine-shaded garden an oil tanker plied its way towards the Black Sea. Small ferries dodged across the sea lanes. It was not, I hasten to add, Davutoglu’s private residence. It had just been borrowed, for the backdrop. But it reminded a Turkish friend of something she had heard once from the AKP, Erdogan’s ruling party: that they would not rest until they were living in the apartments with balconies and gardens overlooking the Bosphorus that had always been the preserve of the secular elite they wanted to replace.

Pamuk also writes about hüzün, the melancholy that afflicts the citizens of Istanbul. It comes, he says, from the city’s history and its decline, the foghorns on the Bosphorus, from tumbledown walls that have been ruins since the fall of the Byzantine empire, unemployed men in tea houses, covered women waiting for buses that never come, pelting rain and dark evenings: the city’s whole fabric and all the lives within it. “My starting point,” Pamuk wrote, “was the emotion that a child might feel while looking through a steamy window.”

Istanbul is suffering a mighty bout of something like hüzün at the moment. In Pamuk’s work the citizens of Istanbul take a perverse pride in hüzün. No one in Istanbul, or elsewhere in Turkey, can draw comfort from what is happening now. Erdogan’s opponents wonder what kind of future they can have in his Turkey. I think I sensed it, too, in the triumphalist crowds of Erdogan supporters that have been gathering day after day since the coup was defeated.

 

Down with the generals

Erdogan’s opponents are not downcast because the coup failed; a big reason why it did was that it had no public support. Turks know way too much about the authoritarian ways of military rule to want it back. The melancholy is because Erdogan is using the coup to entrench himself even more deeply in power. The purge looks too far-reaching, too organised and too big to have been a quick reaction to the attempt on his power. Instead it seems to be a plan that was waiting to be used.

Turkey is a deeply unhappy country. It is hard to imagine now, but when the Arab uprisings happened in 2011 it seemed to be a model for the Middle East. It had elections and an economy that worked and grew. When I asked Davutoglu around that time whether there would be a new Ottoman sphere of influence for the 21st century, he smiled modestly, denied any such ambition and went on to explain that the 2011 uprisings were the true succession to the Ottoman empire. A century of European, and then American, domination was ending. It had been a false start in Middle Eastern history. Now it was back on track. The people of the region were deciding their futures, and perhaps Turkey would have a role, almost like a big brother.

Turkey’s position – straddling east and west, facing Europe and Asia – is the key to its history and its future. It could be, should be, a rock of stability in a desperately un­stable part of the world. But it isn’t, and that is a problem for all of us.

 

Contagion of war

The coup did not come out of a clear sky. Turkey was in deep crisis before the attempt was made. Part of the problem has come from Erdogan’s divisive policies. He has led the AKP to successive election victories since it first won in 2002. But the policies of his governments have not been inclusive. As long as his supporters are happy, the president seems unconcerned about the resentment and opposition he is generating on the other side of politics.

Perhaps that was inevitable. His mission, as a political Islamist, was to change the country, to end the power of secular elites, including the army, which had been dominant since Mustafa Kemal Atatürk created modern Turkey after the collapse of the Ottoman empire. And there is also the influence of chaos and war in the Middle East. Turkey has borders with Iraq and Syria, and is deeply involved in their wars. The borders do not stop the contagion of violence. Hundreds of people have died in the past year in bomb attacks in Turkish cities, some carried out by the jihadists of so-called Islamic State, and some sent by Kurdish separatists working under the PKK.

It is a horrible mix. Erdogan might be able to deal with it better if he had used the attempted coup to try to unite Turkey. All the parliamentary parties condemned it. But instead, he has turned the power of the state against his opponents. More rough times lie ahead.

Jeremy Bowen is the BBC’s Middle East editor. He tweets @bowenbbc

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue