Unleashing global Britain: Hunt has a battle on his hands to persuade pension funds to back UK PLC, says ALEX BRUMMER
Recent turmoil in the banking sector has not cooled Chancellor Jeremy Hunt’s enthusiasm for pushing ahead with financial reforms aimed at boosting UK growth rates over the medium term.
He joined Bank of England Governor Andrew Bailey in expressing his confidence in the resilience of the UK banking system and is ready to consider lifting current deposit insurance for consumers beyond the present £85,000 if that improves the safety of the system.
Hunt is cautious, however, about going too far and creating ‘moral hazard.’
The Chancellor stands full square behind the Edinburgh Reforms (Big Bang 2) and wants to see UK pension funds playing a bigger role in bringing initial public offerings back to the London Stock Exchange.
Backing: Chancellor Jeremy Hunt (pictured) joined governor Andrew Bailey in expressing his confidence in the resilience of the UK banking system
As one of the world’s leaders in hi-tech, third after the US and China, he wants to steer funds, such as local authority schemes, away from an obsession with low-return global investment funds and fixed interest.
Hunt wants to see them committing to hi-tech start-ups, unquoted firms and other asset classes. Most critically, they should back UK plc.
A generation ago 50 per cent of UK final salary pensions were invested in the FTSE 350 firms.
That is down to 2 per cent. Unleashing new investment in Britain is a high priority in spite of the fragility of the global economy.
Persuading over-cautious pension funds they must deploy their trillions of pounds of assets will be easier said than done.
Governor’s reboot
Andrew Bailey is cutting a different figure at the spring meetings of the IMF.
In October he was at the vortex of the liability driven-investment (LDI) crisis which almost brought the final salary pensions of 10m people crashing down and threatened to endanger the banking system.
The Governor talked of ‘all-nighters’ to sort out the problem. Even though the near-catastrophe happened on his watch and the potential for trouble was noted in the remoter reaches of the Bank of England stability report, Bailey has never really explained why regulators failed to act earlier to prevent a problem.
Clearly, using derivative products based on UK government bonds to boost returns was never sensible. Even worse, it turns out that many of the LDIs at the heart of the problem were based in overseas territory.
Having ridden out the storm with the financial system more or less intact, Bailey is on a very different mission.
As a result of the recent turmoil in global banking he wants to see stronger cash buffers in regulated banks and a higher level of deposit insurance.
He also advocates a return to the drawing board and more international buy-in on a ‘resolution’ regime which doesn’t leave central banks and, ultimately, taxpayers out of pocket.
For all the bravado about how the US and Swiss authorities dealt with Silicon Valley Bank and Credit Suisse, there is a recognition that devices such as CoCo bonds (fixed interest securities which rank above equity in bank bailouts) simply didn’t do the job.
At his public appearances here, Bailey has sounded confident that the ruptures in the banking system seen so far do not pose a ‘systemic’ risk.
Bailey has focused on how technology has dramatically changed the speed at which deposits can evaporate many times over. This makes it far harder for regulators to catch a falling knife.
He argues that the biggest problems lie outside the regulated banks – in pockets such as LDIs, the nickel market and the Archegos hedge fund collapse.
It is a calmer narrative from a central banker who has been through the wringer.
At the IMF gathering so far the focus has been on how the jump in interest rates to combat inflation has backfired on advanced country banks.
What it means in terms of Western bank exposure to the debt of emerging market and poor countries – and the potential for huge writedowns – could be the next hurricane.
Fan zone
Anyone watching IMF managing director Kristalina Georgieva’s spring press conference yesterday might have thought they had stepped into a street market.
Reporters jumped out of their seats, waved their arms manically, shouting their country’s names.
At one point one feared a wrestling match might break out between Nigeria and Afghanistan as they sought recognition from the moderator.
From the back of the room came the plaintive cry ‘What about Mongolia?’
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