We won’t let failed bank bosses hold Britain to ransom – EVER again
Reckless bankers will face prison in a credit crisis, says BofE’s No 2 But new fears exist over debt and Brexit effect on fixed loans
ENSCONCED in his ground floor office in the grand surroundings of the Bank of England, deputy governor Sir Jon Cunliffe sounds every inch the softly-spoken civil servant. But he has a tough message to deliver to errant bankers: You won’t get off scot-free again if there is another financial crisis.
Reckless bank chiefs, he warns, will be harshly punished – even possibly jailed. That’s a contrast with the last time, when many were disgusted that the former nabobs walked away with their millions intact and no sterner penalty than a lost knighthood.
Cunliffe is the man in charge of the stability of the UK’s financial system, meaning he is lead-
The key for me is just keeping the head of steam as memories of the crisis start to fade
This is a really challenging time – and my focus is on doing the job properly to the end
ing the drive to make sure bosses will pay the price this time if the banks fail again.
As an English Literature student at Manchester University, he could hardly have imagined he would end up with the task of making sure Britain’s high street lenders never again need a multi-billion pound bailout resting on his shoulders – but then the financial crash was more dramatic than any work of fiction.
He clearly relishes his position at the heart of financial power-broking. On the wall is a 1990s photograph of former governor Sir Eddie George and Chancellor Ken Clarke with an image of his youthful self, then a junior official at the Treasury, hovering in the background.
A quarter of a century later, he takes visible pride in having helped to reform the financial system. In a new crisis, he says, the executives responsible will not be allowed to saunter away from the wreckage.
Instead of sloping off with a large pension they could end up a prison cell. ‘The banking reform act has a new criminal offence which is about causing a bank to fail.’
He adds that errant bank chiefs could also face a raft of lesser penalties including being banned from the City, even if their behaviour has not been quite bad enough to merit porridge. ‘There’s a lot more just below criminal level as well. The test for a criminal conviction is pretty high.’
In future, chief executives will have to carry the can if the lender they run takes on too much risk, doesn’t have enough capital or fails to take heed of whistleblowers.
If there is another crisis, Cunliffe believes the UK banks are in a better position to cope.
‘ I think the banking system is safer, I think it’s stronger,’ he says.
He also believes it i s fairer, thanks to a new process called ‘resolution.’ That’s the Bank’s jargon for sorting out a failing lender without having to turn to long-suffering taxpayers for a multi-billion pound lifeboat.
‘Resolution makes sure that the people who profit from banks actually pay if things go wrong,’ he says – by which he means the sharehold- ers who have made money in the good times will have to stump up.
The new regime means bankers can no longer hold a gun to the heads of regulators and governments.
During the financial crisis, there were only two options for the authorities – bail out a collapsing institution at huge expense to innocent taxpayers, or let it go under..
The latter, in the case of a major bank, could put the entire system in jeopardy so regulators and governments felt they had little option but to opt for a rescue.
Resolution means, Cunliffe says colourfully, that ‘we won’t be held to ransom this time as we were in the crisis.’ It is latest piece of complex new regulation added since the financial crisis to make sure that Britain is prepared for the next one and Cunliffe believes it is working already.
He worries, though, that we will forget the crisis and ease off in our attempts to make the system safer.
‘This isn’t glamorous. This is hard, detailed. It’s very large amounts of work. The key for me internationally and domestically is just keeping the head of steam as memories of the crisis fade.’
Cunliffe sits on the Financial Policy Committee of the Bank of England, which last week moved to rein in a surge in credit card and personal loan debt. Banks were being overoptimistic in estimating the likely losses from those products, he says.
‘ People’s credit records are improving because the economy is better. We thought the banks, in estimating losses, were taking some of the benefit of the good economic conditions and claiming that that was due to better credit quality of the actual borrowers.’
Consumer credit in itself is not a bad thing, but there were signs of a ‘bit of exuberance’, he says.
‘ People were letting standards slip. You’re starting to see it maybe a little bit in mortgage terms. I think and hope this will slow this market down. But if it doesn’t we may have to do more,’ he says.
His committee is also worried about Brexit, and in particular about derivatives contracts, a crucial device in enabling banks to offer hugely popular fixed rate mortgage loans. ‘If you’re borrowing a two year fixed mortgage with a variable rate afterwards the bank may take an interest rate swap that gives it protection against rates moving. These contracts enable the financial system to offer products like fixed rate mortgages.’
There are thousands of them in the system, and their clauses in many cases depend on the UK being in the EU. The fear is that, after Brexit, they may not work.
It is too time consuming to change them all one by one, so the Financial Policy Committee wants the EU and the UK to agree to legislation in advance.
‘The best way to sort this out is to reach an agreement about the continuity of contracts entered into before Brexit that will apply afterwards,’ he said.
He insists very firmly, perhaps not wishing to make a controversial point in the midst of Brexit negotia- tions, that this does not just affect British mortgages but all types of loans, within the UK and on the EU side.
Cunliffe was formerly Britain’s representative in Brussels, prior to Ivan Rogers taking the role. So he understands Brexit well. And as the designer of much of Britain’s new financial architecture, you wonder if this deputy governor could be a candidate for the top job at the Bank when Mark Carney leaves in 2019?
Cunliffe plays it cool, saying he already has a great role.
‘It’s a really challenging time and my focus is on doing the job properly to the end. I’ve no plans after that.’ He is referring to when he turns 65 next year.
It only remains for him to point out that he loves working at the Bank much more than he did being a civil servant, because, he says, like the bankers under his new regime, he is personally accountable.
‘ If I say something I have to account for it, it’s in my name. It’s what makes this job such a privilege to have.’ And with that, he whisks out of his office, heading to Berlin for a summit with his fellow central bankers.