Stresses abound at the Bank of England

The last 24 hours have seen something of a flurry of activity from the Bank of England. Yesterday Nishkam High School was the latest stop in what was supposed to be a grand tour of the country by its Chief Economist Andy Haldane. The was designed to show that he is a man of the people and combined with the expected ( by him) triumph of his shock and awe Sledgehammer QE and “muscular” monetary easing of August 2016 was supposed to lead for a chorus of calls for him to be the next Governor of the Bank of England. Whereas in fact he ended up revealing that at another school he had been asked this.

“Two questions”, she said. “Who are you? And why are you here?”

According to Andy this is in fact a triumph.

Several hours of introspection (and therapy) later, I now have an answer. The key comes in how you keep score. If in a classroom of 50 kids you reach only 1, what is
your score? Have you lost 49-1? No. You have won 1-0.

Perhaps that is the dreaded counterfactual in action. Could you imagine going to Roman Abramovich and saying that losing 49 games and winning one is a success? Of course you would be long gone by then. Anyway there is one girl at the “Needs Improvement” school who has shown distinct signs of intelligence as we note for later how Andy’s somewhat scrambled view of success might influence the bank stress tests released this morning.

What about monetary policy?

Andy has a real crisis here as of course he pushed so hard for the easing in August 2016 then a year later ( too late for the inflation it encouraged) started to push for a reversal of the bank rate cut and then voted for that earlier this month. Here is how he reflects on that.

The MPC’s policy actions in November were described as “taking its foot off the accelerator” to hold the car
within its “speed limit”. This was intended to convey the sense of monetary policy slowing the economy
slightly, towards its lower potential growth rate, while still propelling it forward overall.

According to Andy such a metaphor is another triumph.

It was a visual narrative. Because most people (from Derry to Doncaster, Dunfermline to Dunvant, Delphi to Delhi) drive cars, it was a local and personal narrative too. The car metaphor was used extensively by UK media.

Some are much less sure about Andy’s enthusiasm for dumbing down.

Andy Haldane cites the MPC’s recent use of the “car metaphor” as a success in attempting to engage the public. Which is fine. But I’d like to hear his thoughts on damage caused by bad/inaccurate metaphors (eg. “maxing out the country’s credit card”) ( Andy Bruce of Reuters )

Also there was a particularly arrogant section on inflation which I think I am the only person to point out.

This unfamiliarity with economic concepts extends to a lack of understanding of these concepts in practice.
For example, the Bank of England regularly surveys the general public to gauge their views on inflation.
When given a small number of options, less than a quarter of the public typically identify the correct range within which the current inflation rate lies. More than 40% simply say that they do not know.

Perhaps they find from their experience that they cannot believe the numbers and once you look at the data the 40% may simply be informed and honest.

Bank stress tests

The true purpose of a central bank stress test is to make it look like you are doing the job thoroughly whilst making sure that if any bank fails it is only a minor one. Also if any extra capital is required it needs to be kept to a minimum.This was illustrated in 2013 by the European Central Bank. From the Financial Times.

The European Central Bank has appointed consultants who said Anglo Irish was the best bank in the world, three years before it had to be nationalised, to advise on a review of lenders. Consultants Oliver Wyman, which made the embarrassing Anglo Irish assessment in 2006 in a “shareholder performance hall of fame”, has since been involved in bank stress tests in Spain last year and Slovenia this year.

To do this you need a certain degree of intellectual flexibility as Oliver Wyman pointed out.

Today one sees that differently.

Today’s results

Here is the scenario deployed by the Bank of England. From its Governor Mark Carney.

The economic scenario in the 2017 stress test is more severe than the deep recession that followed
the global financial crisis. Vulnerabilities in the global economy trigger a 2.4% fall in world GDP
and a 4.7% fall in UK GDP.
In the stress scenario, there is a sudden reduction in investor appetite for UK assets and sterling
falls sharply, as vulnerabilities associated with the UK’s large current account deficit crystallise.
Bank Rate rises sharply to 4.0% and unemployment more than doubles to 9.5%. UK residential
and commercial real estate prices fall by 33% and 40%, respectively.

Everybody at the Bank of England must have required a cup of calming chamomile tea or perhaps something stronger at the thought of all the hard won property “gains” being eroded. But what did this do to the banks? From the Financial Times.

In the BoE exercise, RBS’s capital ratio fell to a low point of 7 per cent – below its 7.4 per cent minimum “systemic reference point”, while Barclays’ capital ratio fell to a low point of 7.4 per cent – below its 7.9 per cent minimum requirement.

Regular readers will not be surprised to see issues at the still accident prone RBS which always appears to be a year away from improvement. Those who have followed the retrenchment of Barclays such as its retreat from Africa will not be shocked either. Students will also be hoping that falling below the minimum requirement will be graded as a pass by their examiners!

One move the Bank of England has made is this.

The FPC is raising the UK countercyclical capital buffer rate from 0.5% to 1%, with binding effect from
28 November 2018.  This will establish a system-wide UK countercyclical capital buffer of £11.4 billion.

This sounds grand and may be reported by some as such but it is in reality only a type of bureaucratic paper shuffling as the banks already had the capital so reality is unchanged. Oh and we cannot move on without noting the appearance of the central bankers favourite word in this area.

Given the tripling of its capital base and marked improvement in funding profiles over the past
decade, the UK banking system is resilient to the potential risks associated with a disorderly


We see the UK establishment in full cry. No I do not mean the royal marriage as that is not until next year. But we do see on what might be considered “a good day to bury bad news” with the bank stress tests occupying reporters time this from the Financial Conduct Authority.

The independent review found that there had been widespread inappropriate treatment of SME customers by RBS…….The independent review found that some elements of this inappropriate treatment of customers should also be considered systematic

We may end up wondering how independent the review is as we note it has only taken ten years to come to fruition! People who were bankrupted have suffered immensely in that dilatory time frame. Next on the establishment deployment came as I switched on the television earlier whilst doing some knee rehab to see the ex-wife of a cabinet minister Vicky Pryce expounding on the bank stress tests on BBC Breakfast. If only all convicted criminals saw such open-mindedness.

If we return to Andy Haldane then he deserves a little sympathy on the personal level after all it must be grim doing a tour of the UK when the purpose has long gone. It is revealing that his list of supporters has thinned out considerably although most have done so quietly rather than taking the mea culpa road. At what point will the criteria for success or failure that would be applied to you or I be applied to the Chief Economist at the Bank of England?







35 thoughts on “Stresses abound at the Bank of England

  1. Shaun, I’ve seen the reportage on the stress tests today. Carney is making excuses again for his mis-management. He says that Brexit damage and a Economic downturn cannot be protected against. He counters that simply Brexit damage can be managed or conversely and external (global) downturn can be managed (yippee – we are ok then…).

    The nature of downturns is however they tend to mutually feed off one another. The Brexit uncertainty has and will drag on the economy, also as many readers here know – our economy is one large ponzi scheme, soaked in private and govt debt. We are not going to get just one or the other are we now?

    Paul C.

  2. I am a little puzzled by this.

    To an accountant there is technical insolvency where a body cannot meet its liabilities as they fall due and actual insolvency where liabilities exceed assets. As the lender of last resort I cannot see a bank ever being technically insolvent as one of the prime functions of the CB is to provide cash to cover on demand deposits and this is an open ended commitment.

    Actual insolvency would I think be much more difficult to determine and may only “emerge” over time particularly with large, complicated banks like Barclays. There would also be agreed interim attempts at resolution in some areas (like forbearance in respect of some mortgage debt).

    What is my point? Well, if the banks can get as much cash as they need via the CB then this is not an issue. However, if insolvency is difficult to determine and may take some time to emerge then how can the stress tests realistically determine what capital requirements may be? Putting it another way: are the tests just another gratuitous exercise in obfuscation?

    • Hi Bob J

      I think that they are mostly a public relations exercise. For example how are derivatives contracts dealt with? Especially ones which are complex. The Bank of England should be monitoring data daily and it is its role to be as on top of things as it can be. Whereas I fear the next crisis will come with that dreadful phrase “lessons have been learnt” which usually means nothing of the sort.

  3. As you say, Shaun, this is the establishment in full cry. I just loved the bit about thinking the score was one nil, as 49 people had not voiced any such doubts. It rather sums up the situation:
    1. They are surprised when anyone doubts them
    2. They assume that everyone who is silent agrees with them
    3. They are not very good with numbers
    4. They patronise the rest of us.
    The reality is that the BoE has made a ton of mistakes and either does not know it or wont admit it.

  4. An increase to 4.0% in the bank rate?, assuming a similar pro rata increase in the mortgage rate, do these stress tests then make an assumption of the drop in house prices that would result? If so it is presumably trivial if it expects such a small hit to the reserves as outlined above, I would expect anyone who bought in the last ten years would simply not be able to pay the mortgage if rates went to those levels.
    The effect this would have on the banks balance sheets, I assume has been vastly underestimated by the “experts” at the Bank of England.
    When the houses, having been repossesed go back on the market, at what price would they attract buyers if they were calculating payments at mortgage rates many multiples of todays current deals?
    Just like the tests applied to Anglo Irish, these are a total whitewash job, that bear no resmeblance to reality or reflect in any way the ability of bank balance sheeets to withstand the shocks we all know are coming.
    Below is a link to the catastrophic losses resulting from the bankrutcy of Anglo Irish, and the amounts of Irish taxpayers money poured in.

    • Hi Kevin

      It is interesting how the same number makes different people think different things. I thought a 4% interest-rate may be not far off impossible. Why? Well the current crew at the Bank of England if they carried on with their plans might get there in the 2030s assuming no recession or anything like that. So if we get to 4% it will be in a crisis in which case why would they stop at 4%?

    • Hi therrawbuzzin

      Very good 🙂 . For younger readers who may not understand what a TR7 was, well a neighbour of my parents had one back in the day. It was a lovely looking car but usually got out of their garage just in time to break down.

  5. Following through on Andy Haldane’s car analogy, the BoE foot was presumably hard on the accelerator because the GB Family Car was making a fast getaway from the QE Petrol Station because the GB Family is “bilking”, ie driving off without paying for the fuel!

  6. Don’t be too alarmed. These banks are all public companies and audited by top firms and I am sure that they will raise the alarm if needed, just as they did in 2008.

  7. Great blog as usual, Shaun.
    Yes, Andy Haldane’s speech was condescending. He seemed to take it for granted that the main problem for the BoE was communicating in language its audience could understand. In fact, often enough, BoE spokesmen (I can’t think of any egregious examples involving spokeswomen) don’t even get their facts straight, and the errors are not trivial.
    Sir Jon Cunliffe said at the 21 November Treasury Select Committee hearing on the November Inflation Report: “The Canadian central bank governors said in the early 1990s or late 1980s, ‘We did not abandon monetarism; it abandoned us.’” This is a misquote of something Bank of Canada Governor Gerald Bouey said on March 28,1983, speaking before the House Committee on Finance, Trade and Economic Affairs. Governor Bouey actually said: “We didn’t abandon M1; it abandoned us.” M1 was the narrowest definition of the Canadian money supply, which the BoC targeted between the fall of 1974 and 1982. Former BoC Governor David “Get out of” Dodge claims that Bouey said: This was a year after the central bank stopped targeting the narrow money supply, or M1, which it had been targeting since the fall of 1975: “We didn’t abandon M1; it abandoned us.”
    Former BoC Governor David “Get 0ut of” Dodge has claimed Bouey said “We didn’t abandon monetary aggregates; they abandoned us” without providing a reference. It seems likely this is another of Dodge’s errors of fact. Why would Bouey speak of monetary aggregates, when the BoC never targeted anything but M1? And in 1983, the BoC had not abandoned the idea of targeting any monetary aggregate. In fact, it was actively considering targeting a slightly broader aggregate, M1A, which unfortunately later ran into the same kind of instability problems the BoC had already encountered with M1.
    Cunliffe’s remark suggests that the UK and Canada stopped targeting monetary aggregates at about the same time, when in fact, the UK only abandoned the practice a decade or more after Canada or the US. (The US Fed, like the BoC, moved away from targeting the money supply in 1982.) Arguably, the UK only did so with Ken Clarke’s June 1993 Mansion House speech, since Norman Lamont’s March 1993 budget, in addition to specifying inflation targets, set out monitoring ranges for M0 and M3.

    • You have hit the nail on the head about the condescension from the BoE. I would go further and say that the defining issue both sides of the Atlantic is that the elites seem to think it is all about explaining it to the plebs in words of one syllable. They live in an echo chamber of like-minded people who mutually backscratch and admire each other. So, when they meet the great unwashed, they are astonished at the arrogance of the plebs in questioning their judgment. You see it everywhere, from Brexit to Trump.
      I think that the member of the audience who asked who he was etc could have asked a lot more questions such as how do you sleep at night, why are you paid by us taxpayers?

  8. “Two questions”, she said. “Who are you? And why are you here?”

    I create toilet paper from pound notes, and the reason i’m here is because i only do 1 hours work every 6 weeks which involves putting my hand up at the same time as the Canadian #### who speak in riddles.

    A Haldane

  9. “Two questions”, she said. “Who are you? And why are you here?”


    I will add them to the 5 questions that Tony Benn had of anyone really, but politicians in particular:
    1. What power have you got?
    2. Where did you get it from?
    3. In whose interests do you use it?
    4. To whom are you accountable?
    5. How do we get rid of you?

    I think it should be asked of everyone in the BoE. They would all have an uncomfortable time answering any of them honestly.

  10. I would characterise Haldane’s and the Bank’s understanding of the score thus: one agrees with us. 49 don’t understand and need more education. Perhaps we need to talk in monosyllables….or pictures.

    • Hi hotairmail

      This is how Haldane’s bureaucratic mind explains it.

      “Producing simplified material, like layering, is neither a short cut nor an easy option. Nor is it simply an act of communication. Message simplification is an act of policy. As such, simplified messages need to be agreed and signed-off by policy committees – as were the Layer 1 and 2 messages in the Bank’s November Inflation Report. They are another example of the Marshall McLuhan maxim of the medium becoming the message.

      If one feature of more effective communication with the general public is simplification, a second is story-telling. For most people, stories stick in a way facts and figures simply cannot. “

  11. We’ve had “foot to the floorboards” monetary policy for nearly 10 years. Not pressing quite so hard (ie moving from a panic to an emergency rate) is not “taking your foot off”.

    And it never seems to worry the BoE driver that the car doesn’t respond to the throttle like it used to.

      • Hi Shaun. I think the trouble started with a broken (credit) transmission . Failing to fix that problem has severely , maybe permanently, damaged the engine. The BoE hope to fix everything just using the throttle.

        Or, in layman’s terms, we turned a banking problem into an economic one and are now trying to prevent the economic problem from creating a banking problem again.

        Crazy stuff. The late Eddie Waring would call it The Fil Rouge.


    EU THE ACCIDENT IN MOTION: the French bank Société Générale announced a massive staff reduction jobs. The chairman of the board Frederic Oudea, said that the entire banking industry in Europe is facing serious cuts and the withdrawal of Société Générale is preparing for turbulent times that await us beginning in 2018. It is closing about 15% of its branches. It is also selling off individual business units. He was quoted by the London Financial Times:
    “I am convinced that the European banking sector is going through a kind of new industrial revolution that is likely to extend over the next decade.”
    What we are being called in about by major banks is far more than simply consulting/forecasting. We are dealing with LEGAL issues that will be unfolding with the coming monetary crisis. More and more major concerns need us to address the restructuring of the monetary system they can see is coming.
    The tide is turning and it is a hard turn. There is now appearing a German documentary making its debut concerning the mysterious death David Rossi back on March 6th, 2013, who was the communications chief of the Monte dei Paschi di Siena bank. He fell out of his office window and died. His death has never been truly explained whether it was a suicide or a murder. This film exposes his death within the context of the tense situation within the bank and financial system in Europe.
    Politicians have been finagling banks for a long time trying to hide the truth about the failed Euro. The filmmakers were interviewed by Deutsche Wirtschafts Nachrichten in which they report that the 2009 takeover of Banca Antonveneta by Monte dei Paschi at an insane price was under the supervision of the Banca d’Italia. The state they have a document with the signature of Mario Draghi at the time approving the deal at an extremely high price. The argument is basically that the absorption of Banca Antonveneta was similar to the bailout of a failed bank which started the 1931 Banking Crisis.
    What you must understand is that to sustain the Euro, which is all about keeping the power in Brussels, there have been massive transfers from the north to the south of Europe. This includes Greece, Italy, and Spain. The entire crisis has been the conversions of their previous national debts to Euro. Then the Euro doubled in values. Southern Europe has paid a vast price that has decimated their economies and driven the unemployment of the youth to as high as 60% in regions. This is the LOST GENERATION all to support the power base in Brussels.
    The EU and the ECB have completely failed. This is the entire issue. The bailouts of Southern Europe have created a permanent Euro rescue scheme that has completely failed to help anyone. Greece is the poster-child of the Euro. It is impossible for Greece to ever repay the debts. Italy is still in crisis and Spain is on the verge of watching its budget blow-up starting in 2018.
    Europe has entered a phase where it is no longer about trying to create jobs and a sustainable economic growth. This is now all about holding on to power in Brussels. Nobody will address the issues in advance. Thus, we are being called in by banks who see the handwriting on the wall and want to survive the chaos. This is more of a LEGAL restructuring than just consulting.

    • Really thought-provoking post.
      A point, if I may:
      “•Bank of England’s stress tests are worse than useless – offering false comfort …”
      That is precisely their purpose, I believe.

    • I am half way through “And the Weak Suffer What They Must? by Yanis Varoufakis who was the Greek Finance Minister for a while. He gives the background to the creation of the Euro and explains why it cannot work. When Greece found it couldn’t pay it’s debts it was not allowed to go bankrupt and was forced to take on more debt by the Troika.

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