FT article 30 Dec 2015 noting end of 'Banker Bashing’

Perhaps a question that should have been addressed is should 'banker bashing' have started at all? The UK arrangements for regulating financial services,as it happens put in place by the Labour Party, seemed to be excellent: combining prudential, conduct of business and anti-financial-crime regulation in a single regulatory authority. Also there was monitoring of banks and building societies (deposit taking institutions) via the FSA Financial Risk Analysis and Monitoring unit – FRAM, to identify individual institutions at risk, groups of institutions that could be vulnerable and threats to the system as a whole. 

The US system of bank regulation, on the other hand, was flawed. Its 'on-balance-sheet' leverage ratio focus encouraged securitisation. The rating agencies, perhaps relying on models whose parameters were based on benign financial conditions, gave the securities containing the securitised loans a rating that did not hold up in times of financial stress. This exacerbated the potential for problems.

There was a failure of execution rather than design in the UK. The balance sheet return the BSD3 (launched by the FSA in 1999) would have shown that RBS (whose accounts showed a reduction in bad debts of around £1 billion in 2002) and HBoS were both potentially short of capital. In 2002/3 these two should have been asked to freeze their balance sheets until they shored up their capital.  Equally returns from Northern Rock and others would have shown a reliance on wholesale funding although having more than enough capital. The lender of last resort, the Bank of England, should have provided liquidity to these. Whilst it did not provide liquidity for Northern Rock, it must have done so for the others.

London, located between the Far-Eastern and American time zones is geographically in the right place to be the world’s leading financial centre. Financial services grew out of its role as a port: first the commodities that were unloaded were traded (initially in coffee houses); then financing and related services evolved. The evolution of London as the world’s leading financial centre resulted in a trained workforce for financial services and until recently a regulatory framework that balanced risk management and consumer protection on the one hand with fostering financial innovation and financial business on the other. 

The changes to the regulatory arrangements following the crisis which include increasing capital and liquidity requirements for banks, are addressing a failure of execution via a redesign of the system. If the regulators focus on identifying assessing, monitoring and managing risk, the redesign of the system in the UK to the extent it has been done, would be unnecessary. This redesign probably is being viewed with glee by other financial centres - who want to business to migrate from London to their own centres.

Potential consequences of the increased capital and liquidity requirements could be on the one hand a reduction in available finance to foster Britain’s prosperity and an encouragement of shadow banking’ i.e. non-bank lending, with possible threats to financial stability, on the other.

Many with the interests of the UK at heart, are hoping that HM Government and in particular HM Treasury and the Bank of England would restore a regulatory framework that balances stability and consumer protection on the one hand with the continued success of the UK as the world’s leading financial centre on the other.