New banking regulation mustn’t be the medicine that killed the patient
IN THE four years since the start of the financial crisis, we have walked a tightrope between enough and too much regulation; between the commendable aim of protecting consumers, markets and financial stability on the one hand, and the tendency of politicians, looking to voter concerns and media headlines, to be seen “to do something”.
That is understandable. But the challenge is to do the right thing – drawing a medical analogy, to cure the disease, to inoculate against relapses, but to avoid killing the patient through invasive surgery and overdoses of strong medicine.
The function of banking, but also of insurance, asset management, the derivative markets and other areas of City business, is to allocate and manage capital so it performs an economic function – or more simply, to make the domestic, European and global economy work.
There has been a mismatch between intent and delivery over the past few years, and we are still seeing the consequences. Some of the remedies are policy tools and we can applaud the decisiveness of the chancellor and the governor of the Bank of England – their decision last week to open up the flow of capital, through the banks and out to the wider economy, may have echoes of accident and emergency, but if it supports the patient’s recovery then few will argue.
But it is vital to get the longer term treatment right. The tourniquet has only a limited place in modern medicine. Demanding that banks and, indeed, insurers hold ever-higher capital buffers may reduce systemic risk – but, at a time when capital is scarce anyway, there is a danger of less being available to fund the growth of smaller companies, the development of intellectual property, the expansion of world trade. If the tourniquet of regulation is too tight, the capital won’t flow.
So, as we move to put into place the new regulatory structures under the oversight of the Bank of England, and at a time of great economic and political risk, policymakers need to be acutely conscious of the danger of over-treatment. There are some good signs: the Financial Services Authority has accepted that high quality and independent-minded individuals will be deterred from serving as non-executive directors if the process to clear and authorise them is too rigorous and prescriptive. The proposals to ring-fence retail and commercial banking set out in the government white paper can work given time, pragmatism and the acceptance by government that capital flows should be encouraged, not inhibited. On the fiscal front, the direction of travel on corporation tax is favourable.
Financial services business is not a conspiracy against the common good. Effective supervision and proportionate regulation will reinforce the wider economy, not damage it.
Mark Boleat is policy chairman at Canada Corporation.