The future of regulation of the financial services industry is not just important for the industry itself but for the country and the economy as a whole. There are many proposals, predominantly for increasing the capital that banks here and elsewhere have to hold, particularly during the good times, and for similar increases to the amount of banks' liquid assets.
The purpose of these changes is to create long-term financial stability and, of course, it is necessary to avoid another credit crunch and put right what went wrong in the regulatory framework here and at the very least in the other major financial centres of the world. In so doing, though, it is essential that the authorities strike a balance between the desire for financial stability and the need to finance the economies out of the recession.
For example, right now, banks in the UK are holding twice as much capital than before the credit crunch hit. The reason being that the capital requirements were set on an international basis and the banks were abiding by what were then the international rules – rules which are not surprisingly changing.
Regulatory requirements such as these are costly and so, if new requirements are piled on too high, the banks simply will not be able to support the sort of lending that business and individuals require. It is not possible to use the same money twice, so if more has to be retained by a bank then there is less available for loans. We therefore need to know far more about how much additional regulatory changes will cost, what the impact is, and then decide how to phase them in order that growth is not constrained as a result.
There is a genuine risk that the current proposals to reform UK financial regulation can cause damage, and it is certainly not the case that the banks are seeking to avoid change – the banks are ready for change and they are at the table.
At the same time, both the EU and the international standard setters have their own agendas on risk, on rules for hedge funds and on new pan-European arrangements, to name just three. It is vital for this big international centre quartered in London to have co-ordination among these various authorities. So just as our first request is that changes must be casted and thought through clearly, so our second is that UK, Europe and the international bodies co-ordinate together so that the new requirements come together in an equivalent manner around the world – and on a sensible timetable.
Angela Knight is chief executive of the British Bankers' AssociationReuse content