ALEX BRUMMER: The Old Lady's iron resolve


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There was a time when the Old Lady of Threadneedle Street was the friend of the bankers. The twitch of the governor's eyebrow (now it is Alistair who has the eyebrows) was enough to keep the banks under control.

This did not mean the Bank of England lacked the courage to let the weak links break.

Even a house with the most distinguished history like Barings was allowed to fail by the late Lord (Eddie) George.

Mervyn King

The new tough mood has been engendered by the governor Mervyn King, an outspoken critic of the banks


How attitudes have changed. When Gordon Brown gave the Bank its independence it veered from being the sun king at the heart of the City into an economicmonetary institution based around the old Bundesbank model.

The cosiness came to an end and the banks are now only regarded of interest in relation to economic policy- making. Promoting the City is not really part of the Bank's role.

The new tough mood has been engendered by the governor Mervyn King. He has been an out-spoken critic of the banks both in public and privately, blaming the greed and bonus culture for the 'great panic' of 2008.

King has been at the forefront of the calls for splitting off the banks' useful 'utility functions' from 'casino banking'.

Now Andy Haldane, the Bank's head of financial stability (who reports to deputy governor Paul Tucker) has gone one step further with his declaration that if the bankers up sticks 'it may be a price worth paying'.

In his view the tougher regulation of banks is absolutely necessary to avoid a 'doom loop' which encourages financial institutions to take ever greater risks.

Anyone familiar with the Bank's historic role as an ambassador for the City at home and overseas is likely to find Haldane's comments less than helpful. The City, for all its problems, still has the lion's share of wholesale trading.

There has been a great deal of noise about people leaving and some of the hedge funds have already packed their bags.

But the offer by Tullet Prebon to allow all its staff to shift overseas looks more like a stunt than anything else.

Different banks are adopting different coping strategies. HSBC, for instance, may see some of its French traders return to Paris where the bonus tax is less intrusive, targeting only traders and cash - rather than all bonuses.

Deutsche Bank says it intends to share the pain of the UK supertax among all its staff worldwide.

There will be key traders and bankers who decide it is in their best personal interest to move. But the reality is that London's supremacy is as much about the culture of trading and the support services which come with it - from IT services, to management consulting and legal certainty.

HSBC, which is Britain's biggest bank, could technically move its trading activities back to Hong Kong.

But it would be in the wrong time zone, isolated from the world's biggest foreign exchange markets and regulated by the Hong Kong Monetary Authority. None of these necessarily are attractive options.

It is far too early for the banks to be bleating that they have been poorly treated.

The tougher regulation, including the need to hold stronger capital, is eminently sensible after the overleverage of the past.

Some banks seek to make a distinction between those propped up directly by taxpayers' funds, such as Royal Bank of Scotland and Lloyds Banking Group, and those, like Barclays, HSBC and Goldman Sachs, which are fending for themselves.

What the latter banks forget to mention is that it is the assistance received in the shape of record low interest rates, quantitative easing and mortgage re-financing schemes which keeps them afloat.

Without this hidden hand they might well have run up against RBS-style problems funding their operations.

It is the disguised taxpayer subsidy to the banking system which persuaded one of the biggest beasts in the jungle, John Mack of Morgan Stanley, to write to his board and tell them he wants no bonus.

The Bank and the government have become anti-bank for different reasons. The Old Lady sees the banks as problem children that need to be properly disciplined.

The Treasury reasons are more political. It knows the banks are deeply unpopular and believes there is great political capital in thumping them hard.

This fits into Labour's fairness and soak-the-rich agenda as next year's election looms.

The tax rises and loss of benefits for higher-rate taxpayers are part of this.

Either way the banks feel hard done by. It is healthy that Haldane has taken a lead in calling their bluff.

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