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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What is the EU customs union and will Brexit make us leave?

International trade secretary Liam Fox's job makes more sense if we leave the customs union. 

Brexiteers and Remoaners alike have spent the winter months talking of leaving the "customs union", and how this should be weighed up against the benefits of controlling immigration. But what does it actually mean, and how is it different from the EU single market?

Imagine a medieval town, with a busy marketplace where traders are buying and selling wares. Now imagine that the town is also protected by a city wall, with guards ready to slap charges on any outside traders who want to come in. That's how the customs union works.  

In essence, a customs union is an agreement between countries not to impose tariffs on imports from within the club, and at the same time impose common tariffs on goods coming in from outsiders. In other words, the countries decide to trade collectively with each other, and bargain collectively with everyone else. 

The EU isn't the only customs union, or even the first in Europe. In the 19th century, German-speaking states organised the Zollverein, or German Customs Union, which in turn paved the way for the unification of Germany. Other customs unions today include the Eurasian Economic Union of central Asian states and Russia. The EU also has a customs union with Turkey.

What is special about the EU customs union is the level of co-operation, with member states sharing commercial policies, and the size. So how would leaving it affect the UK post-Brexit?

The EU customs union in practice

The EU, acting on behalf of the UK and other member states, has negotiated trade deals with countries around the world which take years to complete. The EU is still mired in talks to try to pull off the controversial Transatlantic Trade and Investment Partnership (TTIP) with the US, and a similar EU-Japan trade deal. These two deals alone would cover a third of all EU trade.

The point of these deals is to make it easier for the EU's exporters to sell abroad, keep imports relatively cheap and at the same time protect the member states' own businesses and consumers as much as possible. 

The rules of the customs union require member states to let the EU negotiate on their behalf, rather than trying to cut their own deals. In theory, if the UK walks away from the customs union, we walk away from all these trade deals, but we also get a chance to strike our own. 

What are the UK's options?

The UK could perhaps come to an agreement with the EU where it continues to remain inside the customs union. But some analysts believe that door has already shut. 

One of Theresa May’s first acts as Prime Minister was to appoint Liam Fox, the Brexiteer, as the secretary of state for international trade. Why would she appoint him, so the logic goes, if there were no international trade deals to talk about? And Fox can only do this if the UK is outside the customs union. 

(Conversely, former Lib Dem leader Nick Clegg argues May will realise the customs union is too valuable and Fox will be gone within two years).

Fox has himself said the UK should leave the customs union but later seemed to backtrack, saying it is "important to have continuity in trade".

If the UK does leave the customs union, it will have the freedom to negotiate, but will it fare better or worse than the EU bloc?

On the one hand, the UK, as a single voice, can make speedy decisions, whereas the EU has a lengthy consultative process (the Belgian region of Wallonia recently blocked the entire EU-Canada trade deal). Incoming US President Donald Trump has already said he will try to come to a deal quickly

On the other, the UK economy is far smaller, and trade negotiators may discover they have far less leverage acting alone. 

Unintended consequences

There is also the question of the UK’s membership of the World Trade Organisation, which is currently governed by its membership of the customs union. According to the Institute for Government: “Many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.”

And then there is the question of policing trade outside of the customs union. For example, if it was significantly cheaper to import goods from China into Ireland, a customs union member, than Northern Ireland, a smuggling network might emerge.

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.