Lets face it, Financial regulation is in a mess. For too long the government has been happy to sit back and do a bit of political tweaking here and there, but no more. Lord Myners, City minister, crumbled at the Treasury committee meeting after the government published their White Paper on financial regulation. This was seen as a missed opportunity and lacked any real substance. Is there anyone who can regain stability to a fractured financial system?
I thought Shadow Chancellor George Osborne’s approach to financial regulation was a bold and courageous one. Despite what the critics say about instigating ‘turf wars’, someone has to pick up the pieces of the failed tripartite system, introduced by Gordon Brown 12 years ago.
Responsibility for financial stability in the UK is shared by HM Treasury, the Bank of England and the Financial Services Authority (FSA). They constitute the “tripartite authorities”. However, the system failed to foresee, or protect against the financial crisis. Hence, Mr Osborne had no choice but to suggest radical reforms in order to regain trust and confidence, which has been hit hard since the recession.
The government’s approach has been lacking in substance. Its proposals for a Council for Financial Services lacks the rigour and executive power it would need to be effective. It would just be a ‘forum’ for debate and would still rely on the tripartite system. Same old government, same old system.
The Conservatives on the other hand have real meat on the bone. They have explained the sort of tools regulators will have in order to fulfill our economic objectives. Accordingly, there are proposals for caps on leverage, capital requirements and limits on interbank lending.
But what really sets the Conservatives apart is their policies on banking competition. They believe that competition must be restored as soon as possible. The UK, which so heavily relies on its financial services, can ill afford to be uncompetitive in the international banking arena.
What we need to survive this crisis is a competitive, but accountable banking industry. This is something which is at the core of George Osborne’s proposals. He suggests breaking up the banking monopolies and encouraging the formation of smaller banks. This is why the Conservatives plan a new Consumer Protection Agency.
This is no time for policymakers to play the nice guy. What we need is not more regulation, but more effective regulation. The governments proposals simply move the financial furniture around. This is no remedy for long term recovery.
Well, self-evidently the present system didn’t work. The suspicion might be that even under the proposed system the prevailing political/administrative ‘soft touch’ regulatory culture may still have failed in the crisis. That said, I do think the tripartite system made regulatory underlap almost inevitable and while I suspect the ‘new system’ could still fail both the BoE and the general public would know who is responsible and who to blame which I hope might focus the mind.
I agree with the argument that a banks that are too big need to be broken up but I have my doubts that when things settle down that the regulators or government will have the will to act. Ever larger mergers seems an almost irreversible process.
What we need is not more regulation, but more effective regulation.
Oh, yes please, but don’t forget to ditch the old regulations first.
I have some sympathy with our part-nationalised banks, since it is in our nation’s interests to have them make as much profit as possible. Else, the shares won’t rise and the tax revenue will drop further.
You are right, Lord Taylor, that the UK has relied on the financial services sector, recently. The question that needs addressing is whether we should continue, at any cost.
All this stems, of course, from the light touch, hands-off policies of successive governments since the advent of ‘Thatcherism’, aka 19th century laissez faire liberalism, in the 80s.
I don’t think Osborne was bold and courageous. I think he was opportunistically interventionist at a level the Tory benches would have screamed blue murder about, back in the days before the credit cruch revealed this further element of the price we must pay for Mrs T’s very expensive bloomers.
‘Breaking up the banking monopolies’ sounds to me very likely to drive the banks abroad. Mr Osborne may be able to hold on to the ones the taxpayer largely owns for the time being, but what of the largest goose that lays the most golden eggs, Barclays?
No, I don’t think so.
When the QEII sailed into the London School of Economics last November she apparently asked a very pertinent question:
“Why had nobody noticed that the credit crunch was on its way?”
The summary concluded:
“Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.”
I would have put it simpler. There is an analogy between an emerging 1800’s Cooperative Society, adulterated food and now a global financial ‘cooperative’ with adulterated financial products.
The irony is that in both cases it took people that were amoral but not necessarily greedy. They betrayed the poor in the 1800’s and now after a redistribution of wealth, both the poor and better off together. Regulation improved the situation first time around and it will do so this time around.
So do we need a new agency that can test financial products for their quality? Should there be an ‘ISO 9001‘ regime to backtrack ingredients to their place of origin when a problem occurs? How do we pursue them if necessary in a global context?
Ref: British Academy, Letter to HM the Queen
http://media.ft.com/cms/3e3b6ca8-7a08-11de-b86f-00144feabdc0.pdf
The Rochdale Pioneers, Dr William King
http://www.cds.coop/coop_movement/new-to-co-ops/the-rochdale-pioneers
I won’t pretend to have the expertise to meaningfully agree or disagree with your assessment, but it’s good to be given an insight into the most critical issue facing the UK at the moment by someone who knows what they’re talking about. I would be interested in hearing other peers’ views on financial reform too.
In the nineteenth century what percentage of real property mortgaged, insured and speculated upon was productive of some tangible durable or perishable form of wealth? Over the twentieth century how artificial has wealth become on the basic anchor points of the world economy.
Prior to the Second World War how many major leaders saw solvency and liquidity in terms of a national security issue and believed that governments neither absolutist nor socialist might actually hang or shoot them if they squandered the national fortune in such a way as to put the nation and realm at risk?
People need clean water, food, privacy to produce future generations and some homicidal types with licenses to keep away those who won’t let them have those things. The genius of being both civilized and surviving is to step into the gaps left by complex economics and monitoring the connection of society’s economic activity to reality. The free market can do this and so can a treasury. However many decision makers regard this entire point of view as antediluvian. Likely we will not really get on to dealing withthe problems we face as a planet until some nasty new worldwide “-ism” exagerates the need for this naturalist discipline. Then we they have gotten enough energy and power to act we will just have to survive the chaos and horror of a new ideology and get a good sound economic basis for progress — if we are lucky.
I actualy hope the last part of this comment is a bit silly. But I am not sure it is.
The Hansard Society, eh ?
http://www.timesonline.co.uk/tol/news/politics/article6736141.ece
“What we need is not more regulation, but more effective regulation.”
Hmmm…
Thank you all for your interest on this burning issue.
Croft- I appreciate that these new proposals are not faultless, but they are the building blocks on which to grow and move forward. I strongly agree that accountability will go a long way in this rebuilding process. We desperately need good and timely judgment as to the functionality of banking regulation and how to protect against credit bubbles.
Ladytizzy- Profit maximisation is not always the best strategy. Yes it helps, but there are many other objectives that need to be addressed too. Our financial services are fundamental for attracting foreign investment and that is why we need to protect it at all costs. However, it is getting the balance right which is the key point here.
Stephenpaterson- I understand the complexity of these issues. I agree that we do not want regulation reform which drives banks abroad. However, we need continuity across the board and also international consultation. Trust is what we have lost. Once it is restored, the UK will still be a highly attractive market.
N Holzapfel: Thank you for your kind words. I also hope my fellow peers will debate on the issue of financial regulation, which so strongly influences our lives.
Frank Wynerth Summer: I believe that with regulatory reform of our banks, we will no longer need to “survive a chaos” as you put it, but will be able to benefit from a more efficient financial system.