The British government has just perpetrated one of its biggest confidence tricks ever – it has reversed one of the important improvements made after the Great Financial Crash of 2008, and managed to persuade most mainstream media to categorise this as a ‘reform’. It’s an astonishing move, chucking aside the precautionary principle which was so often invoked during the Covid-19 panic. The risk of public harm was not tolerated during Covid – but it can be it seems when it comes to finances.
On 9 December, Jeremy Hunt, the UK’s finance minister, unveiled a package of changes to the rules governing Britain’s financial sector in Edinburgh, Scotland’s capital city – hence this package has been dubbed the “Edinburgh Reforms”.
British government spin-doctors went into overdrive, describing Hunt’s plans as involving “over 30 regulatory reforms to unlock investment and turbocharge growth in towns and cities across the UK” and describing the ‘reforms’ as “agile and proportionate”, repealing “burdensome pieces of retained EU [European Union] law”.
Part of these “reforms” is a decision to end so-called ‘ring-fencing’, described by the Bank of England (BoE) as a key part of the Government’s package of banking reforms designed to increase the stability of the UK financial system and prevent the costs of failing banks falling on taxpayers”.
After 2008’s financial disaster, British banks with a three-year average of more than £25 billion of deposits were eventually required (this legislation was not implemented until 1 January 2019) to separate their retail activities from their riskier investment and international banking business.
The 2008 Crash happened for a number of interrelated reasons, but the biggest underlying cause arguably was that governments and banks ignored barely hidden risks. The immediate cause was the collapse of the sub-prime mortgage derivatives market in the US, but thanks to international banks sniffing easy profits from dealing in collateralized debt obligations (CDOs), derivatives based on these mortgages that were re-packaged and sold and most global banks were exposed to the risk of defaults on these mortgages.
When holders of these sub-prime mortgages started to default, banks everywhere were exposed to unexpected vast debts. On 9 August 2007, the French bank BNP Paribas closed three investment vehicles that put money into US sub-prime mortgage assets using short-term borrowed money. In September 2007, the British bank Northern Rock wobbled and was forced to seek support from the Bank of England. The UK’s first bank run – depositors seeking to withdraw their cash as soon as possible for fear the money would run out – in more than 100 years started.
Taxpayer-funded bank bailouts in the US and Europe cost hundreds of billions of Dollars; some estimates suggest that the Federal Reserve provided around $15 trillion in loan guarantees to US and foreign banks; economies shrank, governments fell, and an era of low interest rates and easy money started. The ripples from 2008 are still with us. The vast sums of fiat cash summoned up by governments to bail-out banks, a vast increase in money supply, laid the ground for the current inflation.
Sir John Vickers, who as chairman of the UK’s Independent Commission on Banking recommended the ring-fencing in order to prevent banks taking big risks that might once again drag retail customers down with them, said in June 2018 that UK banks were not resilient enough to withstand a fresh crisis.
By ending ring-fencing the government will permit banks to use money deposited by retail clients – you or I in other words – to fund whatever they like, to gamble – to indulge in what bankers like to call ‘innovation’. It’s not that derivatives of sub-prime mortgages will again turn sour and threaten global financial stability – the next crisis will emerge as if from nowhere. As Vickers said, the “very fact you can’t predict the direction, size, anything about the next shock is why you’ve got to make sure you don’t have a fragile system when it does hit”. We have no idea where the next crisis will come from; all we know is that there will be a next crisis.
British Banks don’t like ring-fencing because complying with the rules puts them at a disadvantage relative to their peers who aren’t subject to them; foreign banks don’t like ring-fencing because it discourages them from expanding into the UK. The financial sector has by and large put out the flags and cheered Hunt’s ‘reforms’. It’s ‘back to the races’.
One possible big risk to consumers’ finances has flagged itself for months now – cryptocurrencies. Recent events have shown that they can be quicksand. The bankruptcy of the FTX exchange, in which as many as one million creditors have lost their money thanks to alleged fraud, symbolises the dangers that can be involved in cryptocurrencies. But FTX wasn’t the sole cryptocurrency problem in 2022. The collapse of the ‘stablecoin’ Luna, the collapse of hedge funds, brokers and venture capital funds associated with digital currencies, have all highlighted the risk of cryptocurrencies this year.
The leading digital token, Bitcoin, peaked at more than $68,000 a year ago and now is around $17,000. The crypto market was once valued at $3 trillion but now its market capitalisation is less than $900 billion, a drop of more than 60% in the past year.
Cryptocurrencies transcend national jurisdictions – that’s one of their advantages; you can be anywhere and buy or sell one or more of the 9,314 active tokens, and about 300 million people do so. That makes regulation of them extremely difficult. Very few countries accept them as legal tender, El Salvador being one of them; it has lost some $65 million from Bitcoin’s collapsed value.
Understandably there are growing calls for tighter regulatory control over cryptocurrencies. In the US, the former head of the Federal Deposit Insurance Corporation (FDIC), Sheila Bair, has called for regulators “to get on with it because more and more people are getting hurt”. New laws are not required she said; just combine forces and use the “authorities” the various agencies already have. The boss of the Commodity Futures Trading Commission (CFTC) has called for the US Congress to hurry up with new regulations for crypto;
Janet Yellen, the US Treasury Secretary, has added her voice to the ‘regulate cryptocurrency’ attitude. In the UK, the Treasury is preparing new legislation to cover cryptocurrency; the Financial Conduct Authority’s (FCA) head has said that 85% of the crypto companies that applied to join the regulator’s crypto register did not pass the FCA’s anti-money laundering tests. Mairead McGuinness, financial services commissioner for the European Union, has said that some “who were involved in crypto, from the very outset, were doing it because they didn’t want to be part of the regulated, managed system”. That’s precisely correct – the whole cryptocurrency movement started with the explicit ambition of eluding control by any government. Trying to regulate it not only threatens that libertarian aspiration – it is also likely to be impossible, or may drive cryptocurrency trading into places where oversight is impossible, or possible only by drastic measures.
Some commentators suggest that regulators should “let crypto burn”; “these poorly understood tokens should not be legitimated by financial regulators”.
‘Buyer beware’ is a sensible piece of advice but maybe insufficient for crypto investors. The calls for tighter regulation will no doubt result in tougher trading conditions, but those might not be enough to prevent the gullible from getting burned. UK policymakers are pulling in two opposing directions – relaxing safeguards over risky banking while edging towards tougher conditions for supposedly risky investments. The crypto revolution is no doubt flawed, and all too often in the hands of flawed individuals. But banking is little different. One reason why the 2008 crash was so damaging was that contagion spread like bird flu – banks everywhere were up to their elbows in profitable sub-prime mortgage derivatives that suddenly were money-losers. With banks now increasingly offering cryptocurrency services, the risk of a similar contagion is increasing.
There is actually one good way of protecting yourself against the next crisis to hit banks, and also to retain the kind of freedom promised by cryptocurrency. It’s called gold, and more specifically allocated gold with Glint, which is much easier to use as everyday money than any cryptocurrency.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
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