It was hardly the best week to be starting as the new governor of the Bank of England. When he was appointed to the job Andrew Bailey probably didn’t expect to have to be dealing with a global pandemic that has plunged the economy, alongside the healthcare system, into an unprecedented crisis and coming up with solutions for the financial and commercial fallout as millions of people stay away from shops, offices and restaurants.
His officials may well have to devise some form of emergency helicopter money to keep cash flowing as work comes to a stop, or organise a bail-out or two. Despite these challenges, he should also think about the medium term. The pandemic will pass, as they generally do, and he will need a strategy for the rest of his term. There are three big tasks waiting for him.
1. Win independence from the EU
Bailey is a lot more at ease with Brexit than his predecessor Mark Carney ever was. But he will need to work out where his red lines are as we negotiate a trade agreement with the EU. Brussels will have two objectives: it will want to bring the City under its regulatory control forever and it will want to weaken it so that Paris and Frankfurt can take some of its business. The EU is hardly a friendly partner.
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At the same time, the British government will be under pressure from car, chemicals and food manufacturers to make concessions on financial services to win them elsewhere.
Bailey’s job will be to work out where it is most important that the City maintains independence to set its own rules and where it might be willing to adopt European ones to maintain access to its markets. It will be a difficult balancing act, with few obvious answers, but the City’s prosperity may depend on him getting this right.
2. Develop a lighter touch
Post-Brexit, the Bank will need to work out a lighter-touch regulatory system that promotes innovation while at the same time ensuring decent levels of market integrity and protection for investors.
Over the last 20 years as it used the single market to bring more and more powers under its control, the EU has hugely increased the amount of regulation it imposes on the financial markets. The Mifid II regulations became notorious for their bureaucratic complexity and the EU’s war on technology risks shutting down what should be the biggest growth area for the financial markets. It will be great to have the freedom to strip a lot of that away.
The City will need to reinvent itself as we leave the EU and that will mean becoming a tech-focused hub for the global money markets. It will be as important as ever that the City is trusted, but also that it has the freedom to take risks and try new things. That is a tough line for a regulator to draw – but not an impossible one.
3. Encourage a wave of IPOs
For more than a decade, the number of companies quoted on the London market has been in relentless decline. It has fallen from 8,000 at its peak in 1996 to around a quarter of that figure now and keeps on going down. That is a global trend, so it is hardly the UK’s fault.
The rise of the private-equity and venture-capital industry means there are plenty of alternatives for companies wanting to raise capital. But it is still an issue. The City needs thriving initial public offerings to reconnect ordinary savers to the economy and it is part of the Bank’s job to make that happen. But how can it do this?
The Bank could press the government to strip away the layers of corporate governance legislation that were designed to protect investors, but have ended up
driving companies away from the market. It could work out a way to integrate the booming crowdfunding industry into the main public markets. And it could make the case for bigger tax breaks for small investors to get them interested in owning shares again – after all, once the dust has settled on the immediate crisis the markets are going to be very cheap. Ultimately, if there aren’t any quoted companies left then there won’t be a functioning financial market either.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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