King Eyes Parting Shot at Bankers Gearing Up for Carney

Photographer: Jason Alden/Bloomberg

Mervyn King, governor of the Bank of England. Close

Mervyn King, governor of the Bank of England.

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Photographer: Jason Alden/Bloomberg

Mervyn King, governor of the Bank of England.

Bank of England Governor Mervyn King will return to the scene of some of his most acidic public encounters today for the annual occasion that helped define his relationship with Britain’s banking industry.

King will speak for the 10th time at the Mansion House, less than 400 feet from the BOE’s doors in the City of London, as the capital’s financial district is known. His appearance at the event for bankers alongside Chancellor of the Exchequer George Osborne occurs just days before he cedes his role to former Bank of Canada Governor Mark Carney.

King previously used the occasion to tell banks they need more capital and to call for the government to work out how to curb the budget deficit. Since his last speech, he has wondered aloud on why citizens aren’t angrier with bankers, and relations with the finance industry reached a nadir as he forced out Barclays Plc Chief Executive Officer Robert Diamond in the Libor scandal.

“I wouldn’t be surprised if he has a few choice words to say about the City, remuneration and risk taking,” said Keith Wade, chief economist at Schroders Plc (SDR), which has $359 billion under management. “Carney has been a banker at Goldman so he’ll probably be different. He’ll probably be more sympathetic to the banking system and recognize the pressures that exist there.”

King, who began his career as an academic, will be replaced on July 1 by Carney, who previously worked at Goldman Sachs Group Inc. He will deliver his speech, a traditional June highlight of the City’s calendar, at 9 p.m. at the 18th century residence of the Lord Mayor of London.

Shifting Views

King’s Mansion House speeches have shifted from reflections on the success of inflation targeting, to veiled criticism of the previous Labour government’s fiscal plans, to presenting a united front with Osborne.

At his first one in 2004, King predicted robust growth and pledged the central bank would maintain focus on price stability. He also warned then-Chancellor Gordon Brown to ensure his spending plans were “sustainable.”

“He spoke about the great moderation with evident satisfaction,” said John Greenwood, chief international economist at Invesco Asset Management in London. “That concealed growing leverage and the potential for enormous instability.”

By 2007, on the eve of the financial crisis, he noted the potential risks of exotic financial instruments and concerns on credit expansion, while also musing on the “remarkable decade” the British economy had just enjoyed.

Neglect

“The truth of the matter is that he neglected his financial stability objective ahead of the crisis, though I guess he would say he didn’t use his megaphone,” said Chris Scicluna, an economist at Daiwa Capital Markets in London and a former Treasury official.

A run on deposits at Northern Rock Plc took place less than three months later. By the time of his June 2008 speech, the crisis was about to intensify, while inflation had strayed well above the government’s 3 percent limit. Both then-Chancellor Alistair Darling and King recognized the squeeze on living costs. King noted a global credit crunch heralded the end of a ‘NICE’ decade of non-inflationary consistent expansion.

The 2008 event was the scene of the “unforgivable” leak that John Gieve would quit as deputy governor, which the government had agreed wouldn’t be announced for a few days, Darling wrote in his memoirs. King was “livid” and blamed the office of then-Prime Minister Gordon Brown.

Storm Clouds

Storm clouds gathering over the financial system soon provoked the collapse of Lehman Brothers Holdings Inc. in September. Within days, the government rescued banks including Royal Bank of Scotland Group Plc, which remains in public hands. By the 2009 event, the BOE had cut its interest rate to a record-low 0.5 percent and started printing money to stave off a depression.

King’s speech publicly called on the government to produce a “clear plan” to tackle the deficit, a gauntlet thrown at Darling in the audience. He also called for the bank to receive enhanced powers to improve financial resilience.

Darling received a copy of King’s speech just hours before delivery, and regarded it as “a blatant bid for the bank to take over the regulation of banks.” King was straying “into dangerous territory,” Darling wrote.

The Labour government was replaced in May 2010 by the current Conservative-led coalition. Since then, King and Osborne have tended to present a more united front at the Mansion House as the government squeezes the budget deficit.

BOE Minutes

Today’s event is the last before a regime change at the BOE, and follows an acrimonious year in London’s finance industry. After the 2012 speech, King forced Diamond to quit Barclays, while on a radio interview this month, he said Britons have “every right to be angry” with banks.

The bank published the minutes of his final Monetary Policy Committee meeting today, and they show he and two colleagues suffered a fifth consecutive defeat in a push to expand quantitative easing by 25 billion pounds ($39 billion). The six-member majority said the impact of previous quantitative-easing rounds and the Funding for Lending Scheme, announced at last year’s Mansion House speech, were yet to be felt.

“There’s a tradition in the City of regulation by the raising of the governor’s eyebrow, and Carney is going to have to pull the same trick,” Malcolm Bracken, an investment manager in Hitchin, England at 138-year-old stockbroker Redmayne Bentley. “Carney’s got a big reputation but he also has big boots to fill. King is quite well respected in the City.”

Japan Exports

Elsewhere, Japan’s exports rose more than forecast in May as a weaker yen boosted the value of overseas sales, underscoring the profit boon for manufacturers from Prime Minister Shinzo Abe’s reflation campaign. The value of shipments abroad increased 10 percent in May from a year earlier, the most since 2010 and exceeding the 6.4 percent median estimate in a Bloomberg News survey of economists, a Finance Ministry report showed in Tokyo. At the same time, export volume dropped 4.8 percent.

In Europe, an index of Swedish consumer confidence rose to 98.2 in June from 97.7 in May, while the unemployment rate fell to 8.2 percent in May from 8.7 percent the previous month. In Switzerland an index of investor confidence was unchanged at 2.2 in June. The U.S. Federal Reserve concludes a two-day meeting on monetary policy in Washington, with Chairman Ben S. Bernanke set to give a press briefing.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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