Andreas Whittam Smith: Reforming the banks won't be easy – but it can still be done

Though part of an arduous process, a Financial Service Bill could be useful
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The announcement in the Queen's Speech that there will be stronger legislation to curb the banks is no more than a staging post. For the action of one government in one territory cannot be the end of the matter. Banking is largely an international business. Individual units will undertake as great a part of their activities as possible in markets where regulation is lightest. It is as certain that banks will try to avoid controls on their activities by moving their locations as it is that rich people will seek to dodge taxation by the same means.

Which is not to say that the publication of a Financial Services Bill is a waste of space. It is part of an arduous process in which different governments put their own measures in front of their legislatures, conscious that if they are too strict, business will be transferred to less onerous regimes. Anomalies quickly appear.

Peter Sands, chief executive of Standard Chartered, a British bank largely based in Asia, said this week that the bonus restrictions outlined by the leaders of the major nations (the so-called G20 group) in September were warping competition because they were being implemented swiftly in Europe but not elsewhere. Actually, unlike Mr Sands, this encourages me. It means that the US Congress, for instance, can safely move more quickly than it might otherwise have done.

It is important, too, not to under-estimate the sheer weight of lobbying that powerful industries like banking will direct at elected representatives and their governments. The battle is being most ferociously fought in the US. Already this year, the finance, insurance and real estate sector has spent the huge sum of $334m on lobbying in Washington. Believe it or not, this expenditure makes sense to those paying the bills. The US financial services market is the largest and most profitable in the world. Congress rather than the Administration has the power to make the law. Lobbyists penetrate deep into Congress , where their activities are often effective.

The banks' lobbying drive is now well under way. Mr Sands gave a preview of one common argument: policy-makers were kidding themselves, he said, if they thought higher capital and liquidity requirements would be absorbed by banks and their shareholders. The reality is that a lot of that incremental cost will just get passed on to their customers in terms of increased pricing. This sort of specious line is widely used by business to fend off unwelcome government initiatives.

The answer to the banking lobby is that, given the bloated cost basis upon which banks work, there is no need to pass a single penny on to customers. There are plenty of savings that could be made. Moreover as governments around the world have acquired temporary ownership of a number of banks, they could use their powers to demonstrate that substantial gains in efficiency can be achieved. This may be wishful thinking, but the task is there to be done.

Stephen Green, the chairman of HSBC, has advanced a different defence. He argued this week that he saw a real danger that doctrinaire policy and demands that banks must hold more capital could have perverse effects on the economy and society. "Cumulative enhancement of capital ratios at the wrong stage of the economic cycle could easily withdraw credit from the system and cause a new credit crunch". But there is no reason why regulators cannot be flexible in their application of the rules. Mr Green also ignores the recently demonstrated ability of the banks to raise large sums of new capital from their shareholders. What is true, nevertheless, is that banking is likely to become permanently less profitable.

As governments struggle to get a grip on bank excesses, faced as they are by a well resourced lobbying effort that can have an impact on the shape of legislation that emerges, they will be tempted to write their bills in general terms, passing to their regulators the power to fill in the details. This technique would have some advantages. It would make it easier to sidestep opponents. And it would allow for flexible adjustment in light of what governments in rival market places were doing. At the same time, though, it may also create the fresh problem of placing too much responsibility on unelected bodies.

When the Financial Services Bill is published shortly, there will be three things to look for. Does it comprehensively tackle the major abuses that have developed in the system? How does it compare with what other governments are doing? How is the balance struck between allowing flexibility to regulators and having safeguards in place against the misuse of arbitrary power?