On July 8 the UK government published its long-awaited White Paper on reform of the system of banking regulation. Several commentators had called for the abolition of the ‘tripartite’ system of regulation, whereby responsibility for ensuring the stability and security of the banking system is shared between the Financial Services Authority (FSA), the Bank of England and the Treasury. Some have advocated a considerable strengthening of the role of the Bank of England and even abolishing the FSA. What is generally agreed is that there needs to be ‘macro-prudential’ regulation that looks at the whole banking system and at questions of systemic risk and not just at individual banks. Several of the articles below debate this issue.
The government’s White Paper proposes keeping the tripartite system but also strengthening various aspects of regulation. Amongst other things, it proposes giving the FSA powers to ‘penalise banks if their pay policies create unnecessary risks and are not focused on the long-term strength of their institutions’. It also proposes setting up a ‘new Council for Financial Stability – made up of the FSA, the Bank of England and the Treasury – to meet regularly and report on the systemic risks to financial stability’. Banks would also be required to increase their capital adequacy ratios. The first two articles below give an outline of the proposals. The detailed proposals are contained in the third link, to the Treasury site.
Chancellor moves to rein in ‘risky’ banks Independent (9/7/09)
Banks to face tougher regulation BBC News (8/7/09)
Reforming financial markets HM Treasury (8/7/09)
Treasury sees devil in the detail Financial Times (7/7/09)
How to police the banking system Independent (8/7/09)
City regulation: a quick guide Telegraph (8/7/09)
Treasury White Paper: what it means for the financial services industry Telegraph (8/7/09)
Key issues: Financial regulation BBC News (8/7/09)
Alistair Darling accuses banks of ‘kamikaze’ attitude to loans Telegraph (5/7/09)
HSBC boss on banking reform BBC News video (3/7/09)
Bankers ‘want to be proud of what they do’ BBC Today Programme, Radio 4 (7/7/09)
Divisions on display at Mansion House BBC Newsnight video (18/6/09)
Who should supervise the banks? BBC Newsnight video (18/6/09)
Governor wants more bank powers BBC News video (17/6/09)
King puts spotlight on banks too big to fail Times Online (21/6/09)
Mervyn King: Banks cannot be too big to fail Edmund Conway blog, Telegraph (17/6/09)
The City doesn’t need any more rules Telegraph (6/7/09)
Treasury admits ‘intellectual failure’ behind credit crisis Telegraph (8/7/09)
Bankers to face draconian pay veto Times Online (8/7/09)
Questions
- What do you understand by macro-prudential regulation? What would be the difficulties of applying regulation at this level?
- Why may liquidity ratios and capital adequacy ratios that are deemed appropriate by individual banks be inappropriate for the banking system as a whole?
- If banks are too big to fail, why does this create a moral hazard?
- Examine the case for splitting universal banks into retail banks and investment banks.
- Examine the arguments for and against regulating the level and nature of remuneration of senior bank executives.
The east coast mainline from London to Edinburgh is a ‘premium route’. This means that it is one of the lines in the UK that is profitable. When the franchises come up for renewal on such lines, potential operators bid to pay the government for the franchise. National Express won the eight-year franchise in 2007 for a total of £1.4 billion, paid in annual rising instalments.
Although the east coast mainline is still profitable, the recession has meant that passenger numbers have been insufficient for National Express to make its annual payments to the Department for Transport and still be left with a profit. As a result, the government will take the franchise into public ownership later this year. This specially created nationalised company will then operate trains on the route until a new franchise is awarded to a private company at the end of 2010.
So why has this proved necessary? Is it all down do the depth of the recession? Or was the £1.4 billion cost of the franchise unrealistically expensive? Would the answer be for National Express to merge with another operator, such as the First Group? Or should the government be prepared to waive, or at least reduce, the franchise payments until passenger numbers are growing fast enough? Or is it time to rethink the whole UK model of rail privatisation and perhaps return to a nationalised rail system? The articles below consider the issues.
National Express loses East Coast line Independent (2/7/09)
National Express goes off the rails on east coast line Times Online (4/7/09)
Q&A: the future of National Express and the east coast mainline rail service Guardian (1/7/09)
East Coast main line: Q&A Telegraph (2/7/09)
Runaway train: The crisis in the rail sector Scotsman (5/7/09)
First Group sets sights on East Coast Business7 (3/7/09)
National Express’s decision to quit East Coast franchise is a lose-lose for nearly everyone Telegraph (4/7/09)
Focus turns to rail franchise system Financial Times (2/7/09)
Rail network: red signals ahead Guardian (2/7/09)
Have we reached the end of the line for privatisation? Observer (5/7/09)
Privatisation has been a train wreck: Ken Livingstone Guardian (2/7/09)
New Capitalism: Old Capitalism except taxpayer money is at risk: Iain Macwhirter Sunday Herald (5/7/09)
Questions
- Consider the relative merits of temporary nationalisation of the east coast mainline services with providing temporary support for National Express.
- Should profitable rail franchises be awarded to the highest bidder? Similarly, should loss-making franchises be awarded to companies bidding for the lowest subsidy?
- Discuss the arguments for and against a complete re-nationalisation of the railways.
- With reference to the final article above, explain what is meant by a Special Purpose Vehicle and whether it was an appropriate means for National Express to fund its £1.4 billion franchise. What dangers are associated with this and other new forms of ‘no-risk capitalism’? Is there a ‘moral hazard’ in this form of capitalism?
The traditional macroeconomic issues are well-known: unemployment, inflation, economic growth and the balance of payments. However, the environment, and specifically climate change, have become increasingly important objectives for the global economy. Over recent months, many countries have announced new policies and measures to tackle climate change.
The costs of not tackling climate change are well-documented, but what about the costs of actually tackling it? Why is a changing climate receiving such attention and what are the economics behind this problem? The articles below consider this important issue.
Tougher climate target unveiled BBC News (16/10/08)
Brown proposes £60 billion climate fund BBC News (26/6/09)
EU says tackling climate change will cost global economy €400 billion a year Irish Times, Frank McDonald (26/6/09)
Obama makes 11th-hour climate change push Washington AFP, Ammenaul Parisse (25/6/09)
UK to outline emission cut plans BBC News (26/6/09)
What’s new in the EU: EU examines impact of climate change on jobs The Jerusalem Post, Ari Syrquin (25/6/09)
Climate change: reducing risks and costs The Chronicle Herald, Jennifer Graham (25/6/09)
Obama to regulate ‘pollutant’ CO2 BBC News (17/4/09)
Billions face climate change risk BBC News (6/5/07)
Obama vows investment in science BBC News (27/4/09)
Japan sets ‘weak’ climate target BBC News (10/6/09)
Questions
- Why is climate change an example of market failure?
- Apart from imposing limits on emissions, what other interventionist policies could be used? What are the advantages and disadvantages of each of them?
- According to the EU, the cost of tackling climate change is very high. So, why are we doing it? See if you can carry out a cost-benefit analysis!
- Why is climate change presenting a problem for insurance companies? Can it be overcome?
- Why is finance such an issue between developed and developing countries in relation to tackling climate change?
- What is the likely impact of climate changing policies on the labour market? Will we be able to adapt in the current economic crisis?
“‘Capitalism,’ Schumpeter wrote, ‘is by nature a form or method of economic change and not only never is but never can be stationary … This process of Creative Destruction is the essential fact about capitalism”. In the article below William Keegan looks at this process of creative destruction and relates it to the current financial crisis and the downturn in the business cycle.
Moral hazard? It’s just another danger along the capitalist way Guardian (5/10/08)
Time To Drop The Baggage That Comes With Moral Hazard Financial Times (4/10/08)
Questions
| 1. |
Explain what is meant by the term ‘Creative Destruction’. |
| 2. |
Explain what is meant by the term ‘Moral Hazard’. |
| 3. |
“In theory, enlightened economic policies can moderate the workings of the business cycle”. Discuss possible policies that can moderate the workings of the business cycle. |
| 4. |
Discuss the extent to which the recent economic boom was an ‘asset-price boom’ rather than a ‘traditional one’. |
The Northern Rock crisis has caused significant repercussions in the UK financial system. It may continue to do so as the various groups bidding to take over the beleaguered bank try to persuade the government to write off the interest owed on the money borrowed in the run-up to the crisis. In the Guardian article below the build-up to the crisis is considered in detail, while in the other article Anatole Kaletsky argues that central banks need to stand firm against pressure from financiers.
Questions
| 1. |
Explain what is meant by the term ‘moral hazard’. |
| 2. |
Examine the main factors that led up to the Northern Rock crisis. |
| 3. |
Summarise the main reasons why Anatole Kaletsky argues that central banks need to stand firm when pressurised by City financiers. |
| 4. |
Assess the likely impact of the Northern Rock crisis on the performance of the UK economy over the next year. |