Howard Davies has spent fifty years at the intersection of finance, regulation, and public policy — long enough to have helped build the architecture he later had to defend, and to have watched it buckle.
He started as a diplomat, posted to Paris in the early 1970s, where an encounter with the French administrative elite convinced him that the British habit of treating a university degree as a lifetime qualification was not going to serve him well. He left the Foreign Office for the Treasury, went to Stanford for an MBA, and returned to Whitehall just in time to work on both the nationalisation and the privatisation of the same industries — a coincidence that turned out, as he explains, to require exactly the same skills.
What followed was one of the more varied careers in British public life: McKinsey, the CBI, the Bank of England as deputy governor, and then the FSA, which he chaired from its creation in 1997 until 2003. He was there, in other words, when the regulatory framework that would be blamed for the 2008 crisis was being built — and has had to live with the accusations ever since. His view on the “light-touch regulation” charge is direct and, on the evidence, largely correct.
Since then he has led the LSE, chaired NatWest through the post-pandemic recovery, taught financial regulation at Sciences Po Paris, written several books on economics and central banking, and taken on a number of board roles — including, most recently, the chair of Kivalis, a consortium of European banks building a regulated euro stablecoin.
In this conversation, Howard walks through the origins and failures of the Basel capital framework, explains why the 2008 crisis was fundamentally about inadequate capital rather than regulatory culture, and makes the case — carefully — for what regulators got wrong and what they did not. He discusses Brexit as a strategic miscalculation, assesses what two decades of advising Chinese financial regulators has taught him about how Beijing thinks about global rules, and sets out why he believes Europe needs a bank-issued euro stablecoin before dollar-denominated alternatives make the question moot.
His new book, Global Financial Regulation: An Opinionated Guide, is out from Polity Press in the summer. You can find his Project Syndicate columns here, and he is active on X at @HowardJDavies.
Marieke: Hi, I’m Marieke Flament. This is the Currency of Power podcast, the companion to the Currency of Power newsletter, where we dig into currencies, power, and the people connecting the two. Today’s guest needs little introduction, but the breadth and depth of his career demands one anyway.
Sir Howard Davies has spent 50 years at the intersection of finance, regulation, and public policy — from the Foreign Office and HM Treasury to McKinsey, the Confederation of British Industry, the Bank of England, and the Financial Services Authority. He led the London School of Economics through a turbulent decade, chaired NatWest Group through the post-pandemic recovery, and today, among several other things, chairs Qivalis, one of Europe’s most serious efforts to build a regulated euro stablecoin infrastructure.
Sir Howard is also a professor of practice at Sciences Po Paris, where he teaches master’s courses on financial regulation and central banking, and is the author of several books on economics, finance, and regulation, with a new book coming shortly.
Howard and I go back some years. We worked together when he chaired NatWest and I was building Mettle, and we are working together again at Qivalis. Few people have seen more of the machinery of global finance from the inside. Today’s conversation runs approximately two hours. The first hour is open to all listeners; the second — going deeper on China, digital assets, and what comes next — is for paid subscribers. We will cover four areas: Howard’s career and what it teaches us about how institutions actually work; the current geopolitical moment and what it means for markets; his unusually direct perspective on China; and finally stablecoins, CBDCs, and the future of money. Howard, welcome.
Howard: Thank you. That introduction makes me rather exhausted just thinking about all those jobs.
“It was a deliberate, French-driven strategy”
Marieke: Me too! Before getting into the substance — 50 years across so many institutions and geographies, and a career that looks less like a straight line than a series of reinventions. What has been the through line? How did you navigate all of that?
Howard: It all started, interestingly, in France. I began as a classic British amateur. In the UK at the time, a university degree was regarded as a kind of vaccination against needing to learn anything further for the rest of your life. So most people did a degree at the best university they could get into — in my case Oxford — and then entered whatever career they chose as a complete amateur.
I chose the Foreign Office, which seemed an interesting option. Like most young people, I thought travel would be fun. When I was sent to my first overseas posting in Paris, I found myself dealing at length with people in the French system who were, at that time, undoubtedly better trained and better educated than we were. You did your undergraduate degree, or one of the Grandes Écoles, then ENA, and you came out knowing a great deal about public administration, economics, even philosophy. In the UK, that was regarded as of no interest whatsoever — you picked it up as you went along. I found myself somewhat intimidated. Not on language, because I had done a year as an assistant in a French lycée and could hold my own at the Quai d’Orsay. It was simply that they had so much more educational background.
That observation combined with what I could see happening in Britain at the time. We had a Labour government re-elected in 1974, and it seemed the government would integrate forward into more and more areas of economic life through a gradual process of nationalisation — sometimes ideologically driven, sometimes simply because companies were failing and needed rescuing, as with British Aerospace and Rolls-Royce.
I thought the French had the right idea. What would be interesting for a future career was to work at the interface between government and the private sector — someone who understood how government worked but also understood something about business. So I decided to leave the Foreign Office for the Treasury, which was surprisingly prepared to accept me despite my lack of economics training. I also told the Treasury I wanted to go to business school in the US, get a proper business qualification, and then work largely in the public sector. It seemed like a good niche.
The problem was that by the time I finished business school, Mrs Thatcher had been elected. Far from the state integrating forward, the opposite was happening — more and more areas were being privatised. What turned out, though, was that although my personal career strategy was built on a completely wrong assumption, it remained perfectly viable for the opposite reason. There were now more and more areas of the private sector that depended quite heavily on government policy. It is fine to privatise a formerly nationalised industry, but the idea that it then operates entirely without government involvement is wrong. So the strategy proved usable in different ways. I went back to the Treasury after business school, working first on nationalising companies and then on privatising them — and actually the same skills are required.
It was a deliberate, French-driven strategy, motivated by a feeling of embarrassment at being less well educated than the French officials I met. There is nothing that motivates an English person more than feeling the French have got one over on them. That was quite a useful emotional dynamic.
Nicolas: For the record, I went to ENA, and the students there enjoy looking down on the school and explaining to everyone that you learn nothing there. So we may have a different perception — but perhaps things were different then.
Howard: They certainly had a good way of talking about it.
Marieke: That does sound very French. Now, looking at everything you do today — Sciences Po, boards, books — you are incredibly active. What is your filter? How do you prioritize?
Howard: It looks complicated when you are running a portfolio — I chair three companies plus an arts organisation, an orchestra, do some teaching and a few advisory things. But reflecting on it, it is not actually that different from being chief executive of a large organisation. If you are running a university, or chairing a bank, or running a big regulator, you always have to be very selective about where you intervene. There were all kinds of parts of NatWest I could have involved myself in, but would I have added value? In most cases, probably not. The mortgage business was well managed; the people knew what they were doing. A new venture with a complicated regulatory dimension like Mettle — that was somewhere I could contribute.
Even in a single job, you are constantly making choices about where to intervene and where not to. A portfolio is not so different. I do think about it rather like a children’s train set — you have a series of trains and you want to push them all forward. I usually take stock on a Thursday: have I done anything on each of these this week? Is there a call I should make, something I should read, someone I should chase up? It is not so different from running one large organisation. I was chief executive of large organisations for about 25 years, and you make those choices constantly.
“There are no prizes for running a light-touch regime”
Marieke: That is interesting — you can apply OKR-type thinking to yourself, checking each week whether you have moved things forward. Should we go into the substance? The first area is the 2008 crisis. You were the FSA’s first executive chairman from 1997 to 2003, and then the crisis happened. The post-mortems were quite critical of regulators. Is that fair?
Howard: Broadly, it is not fair in most senses, though there are one or two respects where it is. The subsequent analysis in the UK tended to focus on the accusation that the regulator had operated a light-touch regime and that this was a mistake. I can get quite exercised about this, but I will try to stay calm.
I actually confirmed via ChatGPT yesterday that there is no speech, no document, nothing in which I referred to a light-touch regime while at the FSA.
What happened was that when the government changed in 2010, the Conservatives under George Osborne had a strong motive to blame the financial crisis on the previous Labour government. Osborne argued it was all caused by Gordon Brown, who had changed the regulatory system and introduced a single regulator operating a light-touch regime. The fact that the regulator had never mentioned a light-touch regime was not regarded as a relevant detail. It is true that one or two Labour ministers did use the phrase, which made us very nervous at the FSA — there are no prizes for running a light-touch regime, because the market will always disappoint you if you do.
So I reject the notion that it was our strategy, and there is no evidence that it was. But even setting the words aside, you have to disentangle what a light-touch regime could actually mean. Regulation falls into two broad boxes: prudential — the capital regime, how much capital banks were required to hold — and conduct of business.
On the first, the FSA rigorously applied the globally agreed capital regime. There is no evidence that UK banks held less capital than Basel rules required, or less than comparable institutions elsewhere. The problem was that because our economy is heavily dependent on financial services, when financial markets catch a cold, the UK gets influenza — it is simply a larger share of the economy. Some of our banks were badly affected, but the same was true of other large financial centres. In the Netherlands, practically the whole banking system went bust: ABN AMRO, Fortis — more or less everything. So on the substance of light touch in capital terms, no, absolutely not.
On conduct of business, I think with some reflection that we were probably not as aggressive on enforcement as we might have been. I would not say that caused the financial crisis — I do not think mis-selling of interest rate swaps to small businesses, or LIBOR manipulation, brought the system down. But some of those practices did not look pretty after the event.
Insofar as I would accept any guilty charge: not at all on light touch, not at all on capital. The global capital rules were too weak — we know that now — but that was not something the FSA could unilaterally change. Had we said in 2001 that an 8% minimum was wrong and we were going to impose 15%, the reaction would have been hostile. You could not have done it unilaterally because of the level playing field. The global regime was too weak, but it was applied in the UK just as it was everywhere else.
On policing conduct in the wholesale markets — yes, in retrospect, we probably should have been tougher. Some of the practices in securitisation markets were pretty dubious, and the regulators should have been harder on them.
Nicolas: What is your view on how regulation was handled in the US, and the extent to which the US was influencing the approach in other countries?
Howard: For most commercial banks in the US, the rules were being applied very similarly to the UK and the rest of Europe. The exception was the large broker-dealers. Goldman Sachs, Merrill Lynch, Morgan Stanley, Bear Stearns and the rest were regulated by the SEC, which did not have the same approach to capital or the same understanding of it. Those institutions were not regulated appropriately.
Very quickly during the crisis, the US authorities acted to make them banks. Several went bust in the process — Merrill Lynch was effectively rescued by Bank of America, Bear Stearns went bust, Lehman Brothers went bust; Morgan Stanley and Goldman survived. The SEC regulated five major broker-dealers and three went bankrupt. A 60% failure rate for a regulator is quite high. That part of US regulation was definitely flawed, and it was corrected rapidly in the autumn of 2008 when the survivors were forced to become banks regulated by the Fed, putting them broadly on a level playing field with everyone else.
Marieke: On Basel — my understanding is that it emerged post-war as something like a global framework for what bank capital should look like. But it has been loosely followed by the US and more stringently implemented elsewhere. Did that play a role? What is the history of Basel and how consistently is it actually followed?
Howard: The Basel Committee has only existed since the 1980s. It was essentially an Anglo-Dutch creation. At the time, the assumption was that an 8% capital ratio would guard against any but the worst financial downturn.
Basel I was written on a postcard, effectively — you must hold at least 8% capital. The problem was that it was not risk-sensitive. You applied the same 8% whether you were lending to the US government by buying Treasuries or lending to a speculative high-risk mortgage insurer. That was not good enough, so Basel II attempted to correct it.
Interestingly, Basel II was constructed on the assumption that 8% was the right number — it just needed to be redistributed, with lower capital against sovereign lending and higher capital against speculative mortgages. The absolute level was not questioned. In the run-up to the crisis, markets had actually become more volatile, so arguably you needed more than 8% as a baseline — but that was never discussed. Basel II was about redistribution, not about the level.
When the crisis hit, it was obvious the absolute level was too low. The downturn was enough to wipe out the capital of some very large banks — Citibank, RBS, Fortis, Commerzbank — all of which had to be rescued in various ways. Basel was a sound intellectual framework, but the numbers were too small. When Basel III came in, the three-pillar framework was retained because it is intellectually coherent, but the numbers were ratcheted up significantly. A bank like NatWest, on a comparable basis, now holds four times as much capital as it did under Basel I. That is the scale of the additional capital that was needed.
“The numbers were simply too small”
Nicolas: Can we turn to what you wrote in your book Who is to blame about the crisis — your assessment of what went wrong and who bore responsibility? Was it the system, the behaviour of certain players, or something else?
Howard: The number one point is the one I have just made: the inadequacy of the capital base. The amount of capital banks were required to hold was no longer sufficient given the volatility in markets.
Second, regulators had not been good at policing what I would call the regulatory frontier. There were many ways in which banks could effectively increase their financial leverage — through special purpose vehicles, off-balance-sheet structures of various kinds — where the losses, when they crystallised, bounced back onto the core bank’s balance sheet. That was true of much of the securitisation in the subprime market and elsewhere. So the absolute rules were too low, and there were also technically permissible ways of circumventing them which exaggerated the degree to which capital was inadequate when things went wrong.
My own view is that the conduct-of-business failings — the mis-selling, the LIBOR manipulation — were not core to the financial crisis. I do not think they would in themselves have brought the system down. It was the capital. The assumption was that banks would have sufficient capital to absorb market losses and that, if necessary, central banks could step in.
This links to a debate that has gone on for 20 years between what are called leaners and cleaners. Until the crisis, the dominant view — articulated most persuasively by Alan Greenspan — was that central banks should not interfere too closely in markets, because that would damage their dynamism and wealth-creating properties. Instead, they should stand ready to clean up when things went wrong, providing liquidity to stabilise markets during a panic.
There was another current of opinion, mainly from the BIS, arguing that central banks should lean into these cycles — that when bubbles are inflating in asset markets, you should be prepared to say so and take action: tightening loan-to-value requirements on mortgages, restricting margin lending, requiring higher capital buffers. This is now called counter-cyclical regulation.
The crisis settled that debate largely in favour of the leaners. It became clear that even the Fed announcing it would provide liquidity was not enough to stop a panic. The ECB provided liquidity and banks still went bust. So the notion that you should be prepared to intervene when a bubble is inflating is one that most central bankers would now accept, at least in theory. You can see it today in Andrew Bailey warning about a private credit bubble in his role as chairman of the Financial Stability Board. That kind of forward-leaning statement would not have happened under Greenspan.
Nicolas: Are there recent examples of leaners actually acting and reigning in a bubble, or is this still largely theoretical?
Howard: There are practical examples. In the UK, for instance, a few years ago the authorities imposed penal capital requirements on mortgages above 70–75% of property value, and they adjusted those requirements up and down as conditions changed. The Chinese have always done something similar, and quite sensibly.
Counter-cyclical capital buffers are another example — where regulators require banks to hold an additional buffer, say 2%, across the board when markets are running ahead, not based on analysis of individual loans but as a general precautionary measure. Several countries have used these, moving them up and down with conditions. In the UK we had them at 2%, then removed them during COVID to avoid constraining lending during the recovery. So there are plenty of practical examples of what we now call macro-prudential regulation — a term that was barely used in the run-up to the last crisis.
Marieke: Is China the ultimate leaner? It sounds as though they have always done this in a more proactive way.
Howard: You have to distinguish between the broad concept of leaning and the micro-regulation of many individual markets, which the Chinese have gone into extensively. Some of that is for financial stability reasons; some is simply because they want to control property prices in coastal cities that they think are getting out of hand. I do not think that is quite the same as an overall judgment that credit expansion is too rapid and asset prices are generally too high. Some of the Chinese intervention is very micro in focus.
Marieke: You have written about this period, and in your book The Chancellors on Alistair Darling you describe him as a man who dealt a genuinely terrible hand who played it extraordinarily well. What does that tell us about leadership in a crisis?
Howard: The book was the second in a series — whether I live long enough to produce volume three, I am not quite sure. When I was at the LSE, I edited a book called Chancellor’s Tales. I persuaded all the then-living chancellors, going back to Denis Healey, to come to the school and give a lecture not on the politics of each individual budget, but on what it was like to run the Treasury and the British economy during their time. To my surprise, they all agreed, and most produced quite interesting lectures. I edited those into a book with a long thematic introduction covering 1964 to 1979.
During COVID, I thought it a good use of time to repeat the exercise for the subsequent generation of chancellors. I interviewed them all — with one exception — and used those interviews as the basis for a narrative about managing the British economy through that period. I wanted them to tell their own stories about why they made the key decisions they made, and also how it felt to be in charge.
With Alistair Darling, the particular interest was that he had come in as Chancellor when Blair left Number 10 in the summer of 2007 and Brown took over — having previously been Secretary of State for Transport, so with no responsibility for any of what followed — and then the world fell apart. What struck me about his approach was his composure. At that moment, everybody was losing their heads. Brilliant financiers being paid millions of pounds a year were panicking and demanding to be bailed out in every conceivable way. To steer through that required personal solidity more than mountains of analysis. The analytical models were essentially useless — the then-CRO of Goldman Sachs famously remarked that their models told them the market movements of the previous week should occur once in a million years, and they had just happened again. In those circumstances, what you needed was someone calm, prepared to listen, and able to communicate that there was a grown-up in the room trying to maintain control. It was a case where personality mattered as much as policy. Those who worked directly for Darling at the time would validate that assessment.
Marieke: The skill of not making a crisis worse by panicking yourself.
Howard: Exactly. If you can at least do that, you have made a start.
“London was on its way to becoming the onshore financial market of Europe”
Nicolas: Shall we move to the current geopolitical context? A significant thing happened in Britain a few years ago — Brexit, the decision to leave the European Union. It was widely assumed this would give Britain more flexibility to reposition in a changing world. After several years, it is fair to say that has not clearly happened, and it is still not obvious what Britain’s strategic goals are. You have called Brexit a significant mistake. Can you elaborate? Why was it a mistake, and was there anything that could have been done to make more of it?
Howard: The effects of Brexit have been less bad in some respects and less good in others than was widely expected.
In the period running up to Brexit, London had been the great beneficiary of the growth and deepening of the single market, including the single financial market — however incomplete that remains. London was moving from being the offshore financial market for Europe to being effectively the onshore financial market as well. A striking feature was that you would find Italian investment bankers selling Italian corporate debt to Italian investment managers — in London. All these people had families in Milan and worked for Milan-based institutions, but the business was actually being done in London. There is what economists call an agglomeration effect in financial markets, which is somewhat circular: people are there because other people are there, and that reinforces itself. Brexit was a blow to that, and there has been some repatriation of business to domestic markets. EY has tracked job losses, which reached about 7,000 and seem to have stabilised there. That is not enormous — BNP Paribas, for instance, says it employs more people in London today than before Brexit. But there has been a cost.
And looking forward, the push towards a savings and investment union and deeper capital market integration in Europe is exactly the kind of development London would have been well placed to benefit from. As things stand, insofar as a functioning capital markets union exists in Europe, it is in London — and we are no longer positioned to capture that growth in the same way.
On the other side of the ledger, is there anything Britain has been able to do with its regulatory freedom that it could not have done inside the EU? At one level, any pan-European regulation is a compromise among 28 countries, so any individual country, given a free choice, would probably design some rules differently. There have been some examples — most visibly in insurance, where changes to the Solvency II regime in London have been beneficial for the wholesale markets, and which would have been harder to achieve within the EU.
But as a practical matter, when you ask the large American firms whether they want UK regulation to diverge from European regulation, most say not really. The benefits of a slightly more market-friendly regime may be offset by the complications of running two different regulatory regimes within the same institution. Most would prefer consistency.
There is also a deeper point. The EU capital regime starts in Basel — the rules are devised there and then converted into binding legislation in Europe, whereas the US treats them more as best-endeavours guidelines. Why does the EU legislate them rigidly? Because in a single financial market, the French regulator is very interested in what the Latvian regulator does. A Latvian bank can set up in the Faubourg Saint-Honoré and sell into the French market without further restriction if it holds a Latvian licence. So you cannot simply rely on mutual recognition — you need the same capital definition, the same capital levels, because otherwise you are being undercut and you cannot stop it. The rigidity is the price of the open market.
So the degrees of freedom Brexit provided have been fairly limited, and most of the apparent deregulation in the UK is not actually Brexit-related. A lot of it involves reducing requirements that were self-imposed and went beyond anything the EU required — like the Senior Managers and Certification Regime, which codifies individual accountability in detail that has no equivalent in any European directive. We introduced that after the crisis because when bankers were summoned to parliament and asked who was responsible for a bank going bust, they all pointed at someone else. So we codified responsibilities. That regime has since been lightened — but that was something we did to ourselves, and now we are partly undoing it. It has nothing to do with Brexit.
Marieke: I lived what you are describing when I worked at Circle, based in London leading the Europe operations. When Brexit happened, the FCA was actually quite advanced in its approach to crypto regulation — genuinely world-leading. Brexit put the brakes on that because the authority had to redirect its attention. And the loss of passporting rights was significant: previously we could passport a licence across the EU from London. After Brexit, we had to obtain licences on the continent and move teams accordingly. Exactly the consequences you describe, experienced at a small scale.
“All their wives were in Milan and the business was being done in London”
Nicolas: You described the agglomeration effect and London’s role as the hub that made the concept of a single European financial market a practical reality. Does losing London mean Europe has lost its ability to deliver on that promise to investors? It is very hard for Frankfurt or Paris or Milan to replicate what London offered.
