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Investors turning towards risky assets, says Mervyn King

Banks need to set up new capital regulations.

Despite lessons from the earlier financial crisis, investors are looking forward to invest in risky assets in order to improve their returns, according to Sir Mervyn King, governor of the Bank of England (BoE).

King, who made his comments at a hearing focused on the stability of banks in the UK, warned that returns on the US junk bonds declined by 6 per cent. Anticipating that investors are turning toward risky assets, the global stock markets grew, he said. However, the UK and many continental European economies are still facing problems.

“The search for yield appears to be beginning again,” King told MPs on the treasury select committee. “A combination of a weak recovery and at the same time people searching for yield in ways that suggest risk being priced in is a disturbing position.”

Former investment manager Robert Jenkins and Michael Cohrs, a former head of investment banking at Deutsche Bank, told the Financial Policy Committee that banks should be forced to hold top quality capital equal to more than 4 per cent of their total balance sheets.

Meanwhile, Andrew Haldane, executive director of financial stability at BoE, and Thomas Hoenig of the US Federal Deposit Insurance Corporation have suggested for tougher leverage ratios to be implemented by banks.

Mr Haldane told the committee that banks’ risk models lacked “any robustness”. “They’re not a sound basis for the setting of capital regulations. That is increasingly recognised not just by regulators, but by investors in banks,” he said. “The regulatory community made a significant error in the 1990s in the reliance it placed on deeply complex and deeply fragile models. That balance now needs to be redrawn.”

Both Mr Cohrs and Mr Jenkins said they doubted banks would ever be able to price risks to the financial system properly. “They didn’t last time,” Mr Jenkins said. “There are many times in history where they’ve failed. It would be a bad bet to bet that they would.”

Andrew Tyrie, chairman of Financial Policy Committee, said: “Listening to the FPC, I had the impression they think that risk weights aren’t worth the paper they are written on and leverage is too high.”

The regulators also accepted that Royal Bank of Scotland (RBS) and Lloyds Banking Group would need to raise new capital or sell off large parts of their businesses.

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The strange death of boozy Britain: why are young people drinking less?

Ditching alcohol for work.

Whenever horrific tales of the drunken escapades of the youth are reported, one photo reliably gets wheeled out: "bench girl", a young woman lying passed out on a public bench above bottles of booze in Bristol. The image is in urgent need of updating: it is now a decade old. Britain has spent that time moving away from booze.

Individual alcohol consumption in Britain has declined sharply. In 2013, the average person over 15 consumed 9.4 litres of alcohol, 19 per cent less than 2004. As with drugs, the decline in use among the young is particularly notable: the proportion of young adults who are teetotal increased by 40 per cent between 2005 and 2013. But decreased drinking is not only apparent among the young fogeys: 80 per cent of adults are making some effort to drink less, according to a new study by consumer trends agency Future Foundation. No wonder that half of all nightclubs have closed in the last decade. Pubs are also closing down: there are 13 per cent fewer pubs in the UK than in 2002. 

People are too busy vying to get ahead at work to indulge in drinking. A combination of the recession, globalisation and technology has combined to make the work of work more competitive than ever: bad news for alcohol companies. “The cost-benefit analysis for people of going out and getting hammered starts to go out of favour,” says Will Seymour of Future Foundation.

Vincent Dignan is the founder of Magnific, a company that helps tech start-ups. He identifies ditching regular boozing as a turning point in his career. “I noticed a trend of other entrepreneurs drinking three, four or five times a week at different events, while their companies went nowhere,” he says. “I realised I couldn't be just another British guy getting pissed and being mildly hungover while trying to scale a website to a million visitors a month. I feel I have a very slight edge on everyone else. While they're sleeping in, I'm working.” Dignan now only drinks occasionally; he went three months without having a drop of alcohol earlier in the year.

But the decline in booze consumption isn’t only about people becoming more work-driven. There have never been more alternate ways to be entertained than resorting to the bottle. The rise of digital TV, BBC iPlayer and Netflix means most people means that most people have almost limitless choice about what to watch.

Some social lives have also partly migrated online. In many ways this is an unfortunate development, but one upshot has been to reduce alcohol intake. “You don’t need to drink to hang out online,” says Dr James Nicholls, the author of The Politics of Alcohol who now works for Alcohol Concern. 

The sheer cost of boozing also puts people off. Although minimum pricing on booze has not been introduced, a series of taxes have made alcohol more expensive, while a ban on below-cost selling was introduced last year. Across the 28 countries of the EU, only Ireland has higher alcohol and tobacco prices than the UK today; in 1998 prices in the UK were only the fourth most expensive in the EU.

Immigration has also contributed to weaning Britain off booze. The decrease in alcohol consumption “is linked partly to demographic trends: the fall is largest in areas with greater ethnic diversity,” Nicholls says. A third of adults in London, where 37 per cent of the population is foreign born, do not drink alcohol at all, easily the highest of any region in Britain.

The alcohol industry is nothing if not resilient. “By lobbying for lower duty rates, ramping up their marketing and developing new products the big producers are doing their best to make sure the last ten years turn out to be a blip rather than a long term change in culture,” Nicholls says.

But whatever alcohol companies do to fight back against the declining popularity of booze, deep changes in British culture have made booze less attractive. Forget the horrific tales of drunken escapades from Magaluf to the Bullingdon Club. The real story is of the strange death of boozy Britain. 

Tim Wigmore is a contributing writer to the New Statesman and the author of Second XI: Cricket In Its Outposts.