Bank of England chief calls bankers' bluff

Some of the biggest banking institutions currently in the UK aren't likely to be leaving anytime soon as no other country is likely to want them.

The argument that banks and bankers are highly mobile and would leave London if provoked is endlessly deployed to defend bonuses, but it is not interrogated nearly enough.

Now Andy Haldane, the Bank of England's head of financial stability, has called the bankers' bluff. He is on safe ground to suppose there will not be overspill in the departure lounge.

Hedge funds and small financial outfits might be reasonably footloose, but big banks are much less so. And where would the refugee bankers, fleeing cruel persecution in the UK, find sanctuary?

If they really want to turn their backs on advantages such as the English language, the favourable timezone, the world-class cultural life and the honeypot of business services in London, they would have to find a jurisdiction prepared to underwrite their activities.

Tax havens such as the Cayman Islands have been overbalanced by the credit crunch and would not be capable of doing so. Traditional magnets such as Switzerland are stretched to breaking point by supporting their existing banks they would not want to take on responsibility for any more. And why would the US, or China, contemplate burdening their taxpayers with institutions that define themselves as too buccaneering for Britain?

I'm not sure what the optimal size of the financial sector is, but given that taxpayer bailouts are an integral feature of the industry, occurring periodically and costing more each time, it is not in the least obvious that bigger is better.

Proportionately, public sector interventions in the UK during the financial crisis were much larger than in the US or the euro area, reaching more than 70 per cent of GDP this year.

The problem with relying so heavily on financial services is that we are hanging our national fortunes on a sector that is potentially very lucrative, but also ruinously risky. Health, not size, is key.

Haldane's comments are not only interesting in themselves, but because they appear to be a harbinger of a tougher stance.

People are calling this an "ice age" for bankers, but it is blatantly premature for them to be receiving bonuses off the back of free money injected by central banks, at a time when there are still enormous risks.

As I have written many times, some individual households are very highly leveraged and vulnerable to a rise in interest rates. Potentially bad loans in the commercial property sector are looming like a black cloud: £160 billion (Dh587b) of loans are due to be refinanced by 2013. So far, we have only had a liquidity crisis the real credit crisis is yet to happen.