Securing Finance, Mobilizing Risk

Money Cultures at the Bank of England

John Morris

• Publisher: Routledge
• Year: 2018
• eBook ISBN: 9781351624626
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Drawing on the history of modern finance, as well as the sociology of money and risk, this book examines how cultural understandings of finance have contributed to the increased capitalization of the UK financial system following the Global Financial Crisis. Providing both a geographically-inflected analysis and re-appraisal of the concept of performativity, it demonstrates that financial risk management has a spatiality that helps to inform understandings and imaginaries of the risks associated with money and finance.

The book traces the development of understandings of risk at the Bank of England, with an analysis that spans some 1, 000 reports, documents and speeches alongside elite interviews with past and present employees at the central bank. The author argues that the Bank has moved from a relatively broad-brush approach to the risks being managed in the financial sector, to a greater preoccupation with the understanding and mapping of the mobilization of financial risk.

The study of financial practices from a critical social sciences and humanities perspective has grown rapidly since the Global Financial Crisis and this book will be of interest to multiple subject areas including IPE, economic geography, sociology of finance and critical security studies.

Part I

Performing money cultures in London

1 London and the Bank of England

Introduction: the contemporary Bank of England

During the 21-year period that this book covers, there have been three Governors of the Bank of England. Baron Eddie George had been an employee of the Bank of England since 1962 and served for two five-year terms as Governor. In the early 1990s George became known in the media for his excellent working relationship with Chancellor of the Exchequer Kenneth Clarke, to the extent that governance of the UK economy was labelled the ‘Ken and Eddie Show’. In 2003, he was succeeded by Sir Mervyn King. King had been Chief Economist at the Bank of England since 1991 and Deputy Governor since 1998. King’s appointment broke a trend of Bank Governors being experienced bankers because King was the first professional economist to be given the key role at the Bank (Davies and Green, 2010, p. 279). It is entirely plausible to interpret this as a result of the Bank’s focus on monetary policy and targets since 1997, as King had chaired the Monetary Policy Committee (MPC) since 1998. Like Baron George, Sir King served as Governor for two terms. At the end of his second term, King was replaced by Mark Carney, former Governor at Canada’s central bank, the Bank of Canada.

Carney had worked for investment banking giant Goldman Sachs before switching over to the public sector. Carney gained notoriety and popularity for his decision making during the Global Financial Crisis and his stewardship of the Canadian economy during this difficult period. In 2011 Carney also began chairing the Global Financial Stability Board (GFSB). This is an organization which aims to coordinate financial authorities and standard setting bodies so that they may develop ‘strong and coherent regulatory and supervisory policies’ (GFSB: n.d.). Under Carney’s leadership, and reacting to significant features of the global financial system prior to the Global Financial Crisis, the GFSB made progress in consolidating four main priorities (i) constructing resilient financial institutions, (ii) ending the problem of institutions that are too big to fail when they are under distress, (iii) reducing the risks within and created by shadow banking, and (iv) making derivatives markets safer (Bank of England, n.d a). In 2013, with his reputation at a very high level, Carney became the first non-Briton to be appointed Governor of the Bank of England since it was established.

Of particular import to this research, the Bank of England was divided into two separate wings in 1994, one for monetary stability and one for financial stability (Davies and Green, 2010, p. 53). The election of the New Labour government in 1997 saw two further key institutional changes occur within the Bank of England. The first was a separation of powers, between the Bank of England, the Treasury and the newly created Financial Services Authority (FSA). Two separate Deputy Governors were appointed, which exacerbated the division between monetary and financial stabilities (Davies and Green, 2010, p. 53). Broadly speaking, financial oversight was hived off to the FSA. The second was a two-tiered change relating to the enactment of monetary policy: (a) the Bank was made formally independent from political control and (b) the Bank was legally bound to a policy of inflation targeting according to a target set by the Chancellor of the Exchequer.

While these significant changes have been associated with New Labour, they can be viewed as being symptomatic of wider trends in economic governance. In particular, central banking was thought to be best served if it were to focus on establishing price stability (Conaghan, 2012). Central bank independence had been advocated by public choice political science in order to insulate monetary policy from the exigencies of self-interested governments going into the campaign for re-election (Nordhaus, 1975). Furthermore, heavy weight, and later politically important, academic economists, such as Ben Bernanke, Frederic Mishkin and Adam Posen, had argued both cogently and persuasively that inflation had real economic costs, and that inflation targeting was an effective way of shaping inflationary expectations (See Bernanke et al., 1999). Since 1997 the Bank of England has been setting interest rates to target a rate of inflation of 2 per cent. The interest rate was to be set at monthly meetings by a MPC, consisting of nine members; ‘5 bank people and 4 external members chosen by the Chancellor’ (Conaghan, 2012, p. 29).

Created in 2000 as part of the Financial Services and Markets Act, the FSA had four statutory objectives, namely: maintaining confidence in the UK financial system, contributing to the protection and enhancement of stability of the UK financial system, securing the appropriate degree of protection for consumers, and the reduction of financial crime. However, many of the events that occurred under the umbrella term of the Global Financial Crisis indicated that the tripartite arrangement between the FSA, the Bank of England and the Treasury was unclear and ineffective (Davies and Green 2010, p. 77). Certainly confidence, stability and consumer protection had been undermined by the bank run on Northern Rock in 2007, and it is arguable that some sorts of financial crimes had been committed, such as the rigging of the inter-bank LIBOR interest rate during the mid-2000s (Stenfors, 2017).

Reflections on the crisis highlighted that the FSA had been preoccupied with risk at the level of individual institutions. This was thought to have been at the neglect of systemic risk. In the aftermath of the crisis period, the FSA was dissolved and its functions divided between the newly created Financial Conduct Authority (FCA), and the Prudential Regulation Authority (PRA) within the Bank of England. Within this change was the creation of the Financial Policy Committee (FPC). The post-crisis architecture is such that the FCA is consumer based, while the FPC regulates both institutions and the system. In terms of the latter, the FPC is charged with identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. The members of the FPC include the Bank Governor, three of the Deputy Governors, the Chief Executive of the FCA, the Bank’s Executive Director for Financial Stability Strategy and Risk, four external members appointed by the Chancellor, and a non-voting representative of the Treasury (Bank of England, n.d.a). The FPC is concerned with systemic issues, while the PRA is charged with the more granular task of regulating at the level of individual financial firms and institutions.

The FPC publishes a record of its formal policy meetings, and is now responsible for the Bank’s Financial Stability Review (FSR). These FSRs have appeared twice a year and aim to both highlight ‘developments affecting the stability of the financial system, and promote the latest thinking on risk, regulation and market institutions’ (FSR, 1996a). Prior to the Global Financial Crisis, the Bank had produced the review in partnership with an external organization. Initially this was with the Securities and Investments Board and then from 2000, the FSA. Significantly the name was changed in 2006, to the Financial Stability Report in order ‘to reflect a change in content and aims’ (Bank of England, n.d.b). The FPC of the Bank of England has been releasing financial stability reports through press conferences since 2011. In 2014 the Bank began to carry out very public stress tests¹ on important financial institutions in the UK. Stress testing involves the creation of a hypothetical scenario of economic shocks and the simulation of the impact of such shocks on the financial system. In 2016, stress testing developed in such a way that the Bank worked with two different types of test. The Annual Cyclical Scenario (ACS) is based on the Bank of England’s assessment of current risks to financial stability. The Biennial Exploratory Scenario (BES) is not anchored in the underlying risk environment and cycle and is designed to use shocks that are much more speculative and unlikely to happen. The relation between money cultures and stress testing is discussed in full in Chapters 6, 7 and 8.

One further significant development is the ongoing implementation of the systemic risk buffer (SRB) suggested in the Vickers Recommendations. The Independent Commission on Banking (ICB) recommendations on ring-fencing were implemented through the Financial Services (Banking Reform) Act in 2013. The regulations require that the FPC develop a framework for a SRB that will apply to ring-fenced banks and large building societies. The UK legislation ‘implementing the SRB requires the FPC to establish a framework for an SRB that applies to ring-fenced banks and large building societies that hold more than £25 billion of household and small/medium enterprise deposits’ (Bank of England 2016: 5). This is designed to improve loss absorbing capacity in the core financial institutions in the UK. This is an ongoing collaboration between the PRA and the FPC and the capital plan is supposed to be in place by 2019. Chapter 8 will discuss the role of the SRB in the context of capitalization and resilience.

Having outlined key developments in the Bank of England over the 21-year period of study, in the remainder of this chapter I set out how this book contributes to empirical and theoretical studies of central banking. Alongside this, I explain why the Bank of England is of particular import to studies of the interconnections between finance and security. In doing so, the chapter will discuss the development of financial supervision powers and the embeddedness of the Bank in a financial centre oriented towards derivative finance. The chapter concludes by emphasizing the significance of the derivative for a central bank culture of speculative security.

Central banking

Founded as a private institution in 1694, the Bank of England’s key principle at the time was to ‘promote the public good and benefit of our people’ by managing the public debt of the government. This role of ‘national banker’ was clearly and squarely financial. For example, for a widely used financial textbook, central banks are described as being ‘a distinct entity to a commercial bank and providing a number of regulatory, supervisory and governmental functions’ (Valdez and Molyneux, 2010, pp. 20, 55). Similarly, a former First Deputy Managing Director of the International Monetary Fund sketches out another functional explanation when he says that central banks serve as ‘bankers for the government by managing the national debt’ and managing both exchange rates and foreign reserves (Fischer, 2005, p. 170). The most commonly encountered and recognized function of the central bank is the setting of interest rates and in doing so it controls the supply and price of money and credit (Maxfield, 1997, p. 5). Central banks also play a major role in the economy by supervising the commercial banks, and other financial institutions, by serving as a lender of last resort to struggling banks. Such financial functions are considered to promote ‘financial stability’.

In an influential article, Bowman et al. (2012, p. 456) have pointed out that central banks’ ‘pivotal role in post-crisis capitalism has not been adequately politically or theoretically addressed in any existing literature’. This alludes to the fact that although authors across a range of social science disciplines including international relations, anthropology, communication studies, international political economy, sociology and human geography have pushed and pulled at the question of what a central bank is and how it operates, such work has almost exclusively looked at the monetary, inflation targeting feature of central banks (Guthrie and Wright, 2000; Smart, 2006; Krippner, 2007; Hall, 2008; Holmes, 2009, 2014; Mann, 2010; McCormack, 2012, 2015; Braun, 2015, 2016; Siklos, 2017). Despite playing a ‘pivotal role’ in crisis management, and consolidating their power following the crisis, the financial stability functions of central banks and their role have garnered considerably less attention² (Bowman et al., 2012, p. 466). This is not to deny the ‘centrality of stable money to capitalism’, but rather, to attend to another key feature of financialized capitalism (Mann, 2013, p. 71). The distinction between monetary and financial stability policy has analytical consequences. One salient analytic consequence of this is that most studies of central bank monetary policy – in particular those outside of the European Union – can assume the relatively self-contained nature of institutions, as monetary policy is predominantly a nationally conscribed concern. That said, authors such as Hall (2008) and Holmes (2014) do point to monetary policy having been shaped, to some extent, by an ‘epistemic community’ of economists and a wider intellectual context (Haas, 1992; Finnemore and Sikkink, 1998). Financial stability, alternatively, is a transnational issue, requiring international co-operation, and top central bankers, such as Mark Carney, have both national and transnational roles. The point here is that institutional financial cultures are shaped by global regulatory contexts, as well as from within those institutions. In order to highlight this, I relate Bank of England thinking to the changing approach of the Basel Committee on banking regulation, although it is not obvious which institution is driving the changes (Lewin, 2017).

Further, the existing social science literature has attempted to conceptualize the power of central banks in a way which can be characterized under three main themes – functional, structural and social constructivist. Here I first review these three strands of literature before developing a fourth account which attends to performativity. The focus of the latter approach is, I argue, able to add something to the three other overarching approaches. That is to say, on the one hand, the persuasiveness of the idea of the central bank preceded its structural and functional role in the economy. On the other hand, the impact of the central bank is due to both material and discursive factors, and these two elements are inseparable.

In terms of a functional view, a central bank is a distinct entity to a commercial bank and performs a number of common and similar, yet hardly uniform, regulatory, supervisory and governmental roles. Geoffrey Ingham (2004) provides a sketch of central bank power which is functional. Central banks are said to be integral for the liquidity of the payments system as they provide short term funds to ‘enable the commercial banks to balance their books and to augment their reserves after they have met the demand for loans’ (Ingham, 2004, p. 137). Furthermore, central banks are said to be critically and functionally influential because of their ability to act as ‘lender of last resort’ (Ingham, 2004, p. 142). On such a ‘neo-Chartalist’ view, central banks bot...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright page
• Table of Contents
• List of figures
• Preface
• List of abbreviations
• Introduction: financial stability as speculative security
• PART I Performing money cultures in London
• PART II A money culture of speculating on risk
• PART III A money culture of speculating for risk
• Conclusion: financial stability in the twenty-first century
• Index