Log In | Subscribe | | |

Carney gets it wrong again.

BIScom Subsection: 
Author: 
Nigel Morris-Cotterill

It was an enormous mistake to appoint Mark Carney as the Governor of the Bank of England. In a job that is supposed to be a-political, because the Bank of England is supposed to be independent, Carney has demonstrated a willingness to make political statements, endeavour to influence policy and now in what should be his last major speech, he's announced an astonishingly reformist policy shift in the weeks before his term comes to an end. All the fuss in the media this morning is about Facebook's Libra. However, there is something that has the potential to cause far more systemic problems than that.

Published at https://www.bankofengland.co.u... is the text of the Bank of England's Governor Mark Carney's speech last night.

An economics star, he hold degrees from both Harvard and Oxford, spent time, amongst other things, at Goldman Sachs and as Governor of the Bank of Canada. He was appointed Governor of the Bank of England in 2012 by a Conservative government and took up his position, which has been subject to heavy criticism as to his remuneration package, in 2013. His attitudes have generally been left of centre. He has been a vocal opponent of the UK's decision to leave the European Union and has made repeated predictions of economic catastrophe. In addition to being Governor, Carney holds a range of influential positions: First Vice-Chairman of the European Systemic Risk Board, a member of the Group of Thirty and the Foundation Board of the World Economic Forum.

In his speech, Carney made a number of points that are worthy of considerable consideration. Here, however, we focus on two.

The first is the headline grabbing announcement that he has given a "cautious welcome" to the Facebook crypt-currency Libra. The second, on the other hand, did not grab headlines but is arguably systemically more important.

For that reason, let's look at the second one first. For it is in the second one that Carney proposes the near-abolition of the banking system as we know it.

How? By removing the need for new payment systems to do a major part of their business through banks. There are many words in the speech, much of it in that superficial language that civil servants like to use to obscure what it actually happening in the depths so here is it in plain English. The Bank of England, in June 2017, quietly allowed a handful of payment services providers to clear payments through accounts at the Bank of England, without having to use the services of commercial banks. The plan is now to allow a far wider range of payment services providers and non-banks to directly hold accounts with the Bank of England and to clear directly through the bank and, importantly, to hold interest-bearing deposit accounts at the Bank of England. It moves them from non-banks to quasi-banks and, on any reasonable analysis, hints at the deletion of the qualification of "quasi."

So, let's look at why this might be a good idea: first, the banks make substantial profits from the accounts of payments services providers. Amongst other things, they earn from their "float," that is the amount of money they keep in their accounts as, effectively, a minimum balance to protect against surprises. Banks use that float as part of their own "assets" and - if you dare, think back to the early days of the global financial crisis - lend it to each other on overnight markets (Libor, etc.). When that overnight money dries up, banks fail. Oh, wait: so that's not a reason to consider this a good idea, then.

Because banks charge payment process providers for their services, the price of using such providers could be reduced if the banks were not involved. True - but while some payment services providers make a good job of reducing the cost for consumers, some charge outrageous amounts. There is absolutely no guarantee that taking the business from banks will lead to reduction in costs for customers of money transmitters, for example. If the idea is to reduce the cost for P2P transactions, or instant payments (in which the Bank of England thinks that the UK's cautious approach to an ever-increasing array of payment options is a bad thing) then, again, with many charges being bundled into subscriptions for other services, e.g. mobile phones, wallets, etc, there is scant evidence that any savings will flow.

Carney's speech suggests that his - and the Bank's - view of payment services is that more is always better but while there has been thought given to keeping up, there seems to have been remarkably little consideration of whether there are benefits in slowing down: is the astonishing fragmentation of payments actually in the interests of society as a whole? Are we going to see savings coming out of banks, where they are safe, and being stored in a multitude of wallets? Are those wallets, in practical terms, any different to the "truck" which was made illegal because it restricted workers to shopping in the company shops? A wallet is a form of tie to a particular provider of goods or services.

In short, what the Bank of England is now planning is a new class of banks which will not be called banks.

It is fascinating that on the one hand the Bank of England has for years been complaining that there is an ageing population but it is actively encouraging the disenfranchisement of the elderly by compelling, facilitating others to compel, the elderly to use technology that they do not understand, do not like, fear or, at its most basic, literally cannot use for reasons of physical impracticality. Carney said "From the perspectives of UK households and businesses, wider access can improve inclusion and services." Well, no: that's not the evidence on the ground where the reliance on smart-phones and other devices is actively disenfranchising many, either by reason of inability or because they don't want to carry a phone everywhere they go.

"As we extend access, we will safeguard resilience by holding settlement account holders to the appropriate standards. Along withthe FCA and HMRC, who together supervise these institutions, we are committed to applying a strengthened supervisory regime for those who apply for a Real Time Gross Settlement settlement account, to give assurance that non-bank PSPs can safely take their place at the heart of the payment system." Screams of "yeah, right." One of the essential features of regulation of the financial sector has been to, in effect, deputise the banks, etc. to make sure their customers don't get into too much trouble. In principle, the idea of directly regulating payments services providers, etc. is a good idea - provided they are regulated to the same standards as those whose services they will now be able to escape from.

And there's another thing: if all the money is stored in wallets and therefore in the Bank of England, where will commercial banks get their money to lend? They will be lenders without capacity. Strike .. oh, I've lost count but it's too many and I've not even given it much thought yet. I'm sure there are far more risks than I identified at first blush.

And so to "Libra," widely referred to as Facebook's' virtual currency but in which Facebook is a major, but not the only, party involved.

"The Bank of England approaches Libra with an open mind but not an open door. Unlike social media for which standards and regulations are being debated well after it has been adopted by [thousands of millions] of users, the terms of engagement for innovations such as Libra must be adopted in advance of any launch Libra, if it achieves its ambitions, would be systemically important.As such it would have to meet the highest standards of prudential regulation and consumer protection.It must address issues ranging from anti-money laundering to data protection to operational resilience.Libra must also be a pro-competitive, open platform that new users can join on equal terms.In addition, authorities will need to consider carefully the implications of Libra for monetary and financial stability." That's what Carney said.

It would be easy to take that at face value but we should not. We should first shout out "Second Life" to remind the Bank of England that global virtual currencies are nothing new (Second Life wasn't the first but it was the first to achieve market penetration amongst people who regarded and treated it as a closed financial system that had interchange with the outside world.) The world of on-line games is now an enormous parallel currency market, legal and illegal, and money laundering and payment for illicit products and services are, if not rife, certainly a significant activity. What's even worse is that this has happened, in the open, under the noses of the authorities who have been fascinated by The Dark Web.

But Facebook is special: first, its security is dismal - it admits to having millions of fake accounts. Bags I inspect their CDD systems and get handsomely paid for pointing out that it's rubbish. Secondly, its data collection is extraordinarily intrusive - its plan to integrate Facebook, Instagram and WhatsApp will give it, if it does not already have, an incomprehensible level of detail of the lives of all who interact with it - and it's very difficult not to or, at least, for it to find out stuff about you not because you tell them anything but because it gleans information about you from what other people say. Facebook already has some kinds of payment system.

The big danger of Libra is that, because of Facebook's enormous global market penetration, it will rapidly grow to rival central banks while no single authority supervises it and controls it. Facbook's population is greater than any single country on earth. Read that again. And again. Then consider the influence a currency within that population will be able to bring.

So, let's link those to things together: Libra as a financial force to rival a central bank and a central bank that says "we'll give you an account."

When I was in practice, one of the rules I told business clients they must always abide by was this: never let any customer own more of your business than you do.

That is precisely where the Bank of England is headed. As, for all practical terms, the operations of other non-banks with directly held accounts becomes intertwined with, even dependent on or even folded into Libra as the dominant force in alternative currencies, the very existence of central banks offering similar services will be under threat. Currency crises will be simple to orchestrate, wild swings in economies will become the norm. We've seen markets destabilised and governments toppled by the power of the hashtag brigade.

Is this scaremongering? Absolutely not: the principles are well established. Last week, so-called "netizens" broke up Jackie Chan's PR tour of Taiwan, where he has always been very popular, because they didn't like one comment he made; we've seen the hysterical responses to on-line campaigns; we've seen the power of so-called "fake news."

To think of non-banks and / or a currency generated by a global company that has demonstrated a fundamental lack of social responsibility as in some way containable within silos is madness.

And in the meantime, the profits of UK banks will inevitably fall; share prices will fall in anticipation once the effects of Carney's speech on the float, etc. is assessed.

We have to assume that he knows what he's doing and that Carney is planning ahead: after all, that's why he was appointed, right?

The only thing I hope is that that's not true and that he's just failed to get a grip on it but someone else will because, if not, things are going to get rocky.