Banking and the moral hazard
HOW almost quaint the distaste for encouraging ‘moral hazard’ among banks sounds now.
The phrase was voiced by Bank of England governor Mervyn King at the time of the credit crunch and Northern Rock debacle more than a year ago.
Critics thought the governor was not living in the real world, as fears grew about the collapse of the financial system.
None of us are now living in that fantasy world of ‘prudent’ banking any more. You just have to do what it takes to make sure the system survives. Welcome to October 2008.
The world’s banking framework has been devastated and, quite simply, a refusal to encourage moral hazard - rewarding banks by bailing them out of irresponsible lending is a luxury the financial system cannot afford.
When you get to the point of having to nationalise even if temporarily a fair slug of the British banking system, it is clear all the old banking/government verities have gone out the window.
Royal Bank of Scotland, possibly HBOS, definitely Nor
thern Rock and part of Bradford & Bingley...the list of British state interference in banks is long. Who’s to say it won’t get longer?
That arch breaker of central banks, George Soros, put his finger on it recently when asked whether banks should be bailed out of their sins.
A prime exponent of realpolitik, Soros said in the dangerously uncharted banking waters we are in now the stability of the financial system had to trump moral hazard.
Much as the public has every reason to be angry at the precipice to which profligate, bonus-fuelled bad bank lending has brought us all, it would be society biting off its nose to spite its collective face if governments did other than what they were doing now.
But we should remain cautious. Each time there has been hope of a line being drawn under the banks' implosion we have been disappointed.Northern Rock, Bear Stearns, Fannie Mae and Freddie Mac, Lehman, the US bailout...
Now the British authorities, and it looks like their European counterparts, are seeking an altogether more comprehensive recapitalisation of the banks to get lending moving again.
Things look more solid after the Treasury’s latest action. But we remain in perilous waters.
Last Updated: 13/10/2008