Risk aversion is crushing dynamism and growth

The stifling caution of the City’s regulators must be moderated if struggling UK plc is to regain its mojo

Last week, Andy Haldane, a former chief economist at the Bank of England, gave a speech in which he declared “we are all Nigels now” and revealed that he, like Nigel Farage, was “debanked” last year.

An unnamed high street lender had told Haldane he’d been designated as “politically connected” because of his work at Threadneedle Street and therefore refused his request to open an account. As Haldane explained, there were three problems with this.

First, he no longer worked at the Bank and had already moved to his current role as chief executive of the Royal Society of Arts. Second, the Bank is independent from Government and therefore, by definition and by statute, apolitical. And third, the Old Lady of Threadneedle Street is that lender’s regulator. It comes to something when a bank is debanking the Bank. It would seem that not even the watchdog’s own (ex-)employees are safe from overzealous regulation.

When Natwest closed Farage’s account at its private bank, Coutts, last year the former head of the Brexit Party said the decision was driven by political bias. He wasn’t alone; some 140,000 companies have been debanked since then, said Haldane, who argues the controversy illustrates how risk aversion hampers economic dynamism and throttles growth.

His speech was an interesting counterpoint to one made by Rachel Reeves the day before in the City, in which she claimed the upcoming election will be one in which “stability is change”. You can see where the shadow chancellor was coming from with this oxymoron. Reeves is clearly trying to pitch Labour as the safe pair of hands after years of Tory “chaos”.

All the polls suggest it’ll work but it’s not hugely inspiring; she and Starmer could do with some “hopey-changey stuff ”. At best, Haldane argues, Reeves’s brand of “securonomics” provides only half of the answer to the various pathologies with which the UK is grappling. “Stability is good but not remotely good enough for progress and prosperity,” he said.

Haldane pointed to what John Maynard Keynes called the “paradox of thrift”, where an attribute considered admirable in an individual can have a calamitous effect if adopted by everyone at the same time, as it leads to a fall in aggregate demand and hence in economic growth. Today, he says, we’re gripped by a paradox of stability in which individual regulators try to minimise risk but, collectively, curtail investment, entrepreneurship and dynamism.

Watchdogs are always an easy target. Twenty-two years ago, Sir Howard Davies, then head of the Financial Services Authority, bemoaned the fashionable view of regulators as Shakespeare’s “caterpillars of the commonwealth: creatures who, far from adding value, get in the way of the market”.

Not so long after that, Lehman Brothers collapsed and regulators were berated for not doing enough.

Haldane, however, is not calling for a regulatory bonfire and his diagnosis deserves to be taken a little more seriously than most. For one thing, he’s been a caterpillar; in a previous life he had a hand in creating “two regulatory monsters” in the form of Basel 3 for banks and Solvency II for insurers.

And, for another, he has a more nuanced view of risk than most. Individual regulations may very well have been put in place for entirely admirable reasons “but collectively have the consequence of chilling risk appetite and stalling investment”.

There is, Haldane is saying, a risk in doing nothing. But the impetus for change has to come from above. That starts with a reassessment of the fiscal rules. As currently crafted these are locking the UK into a trajectory of falling investment over time and should be reconfigured to focus on net worth (including the nation’s assets) and not just gross debt.

Haldane was less clear about what should be done with individual regulations. There’s clearly a trade-off here. The current travails of the UK stock market have, for example, led to inevitable calls for changes in listing rules to make London more attractive to new issuers.

In December, the Financial Conduct Authority suggested this could lead to more Uk-listed companies collapsing but it argued the changes “would better reflect the risk appetite the economy needs to achieve growth”. This would be exactly the kind of Schumpeterian creative destruction that Haldane argues has been missing.

More broadly, there needs to be a way for legislators to lean against the natural risk aversion of regulators without overstepping the mark and threatening their operational independence. Recent history suggests that won’t be easy.

As Chancellor, Rishi Sunak proposed allowing ministers to “direct a regulator to make, amend or revoke rules”, arguing that these “call-in powers” would make watchdogs more democratically accountable.

Sam Woods and Nikhil Rathi, the heads of the Prudential Regulation Authority and the Financial Conduct Authority respectively, fought back, arguing that rather than boosting competitiveness, it would undermine the UK’S credibility. Woods said it would probably create a system “in which financial regulation blew much more with the political wind”. Eventually, the Government backed down and the plans were scrapped.

Instead, the Government gave the Bank of England a secondary mandate to promote competitiveness and growth. This, too, has its critics who complain it amounts to a conflict of interest for regulators. On the flipside, those in the financial industry complain that the mandate has, so far, proved “very secondary”.

One proposal from the Conservative peer Lord Bridges, who serves as chair of the House of Lords economic affairs committee, is for the establishment of a new body to oversee the City’s regulators, similar to the Office for Budget Responsibility.

Given the amount of ire the OBR seems to engender this is another proposal that will sharply divide opinion. It certainly smacks of an additional layer of bureaucracy.

As things stand, however, it is the only solution anyone has found that has a chance of striking the balance between ensuring regulators are democratically accountable without them becoming overly political. One thing’s for sure, as Haldane argues, the status quo is not sustainable.

‘Haldane is not calling for a regulatory bonfire and his diagnosis deserves to be taken more seriously’