There was a time when one had to wait at least 20 years between big banking crises. Perhaps this was because the generation that had learnt the hard way had to retire before the next crop could repeat the mistakes of their elders. This is no longer the case. Business leaders who were present at the most recent crash seem determined to ignore its lessons – even before the damage has been repaired. The latest example comes courtesy of Carolyn Fairbairn, head of the CBI, the UK employers’ organisation. Among her suggestions: scrap the bank surcharge tax and ensure that regulators give priority to the sector’s competitiveness. “It’s time,” she says, “for banks to be taken off the naughty step. This is about sending a signal that a chapter [of crisis] is over.” High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. Really? The crisis is not over. The damage done has yet to be repaired fully. Eight years after the collapse of Lehman Brothers, interest rates are at historic lows; government deficits are high; and two of Britain’s biggest banks remain in state hands. Low rates are driving pension deficits higher. Plugging these deficits diverts funds from companies – funds that might otherwise have gone into building up their businesses.
The financial system remains fragile. Regulators have tried but failed to strengthen the system adequately. The attempt has involved capital requirements, a resolution regime and stress testing. How are they getting on? With respect to capital, regulators have raised minimum requirements and placed a cap on leverage. But, at present, the rules permit bank balance sheets to balloon to between 20 and 33 times their loss-absorbing equity. At that level of gearing, a decline of 3 to 5 per cent in the value of bank assets will wipe out 100 per cent of capital. In addition, regulators are working on a cross-border regime by which they might effectively resolve struggling big banks. Alas, the regime is not yet in place. Then there are stress tests. These are meant to gauge the level of loss that banks might suffer under adverse scenarios. This is a useful exercise but one whose effectiveness depends on regulators knowing which risks to test and by what degree to do so. That is a lot to presume: last time around, regulators managed to miss the biggest credit bubble in history. Given all that, our biggest banks remain too big to let fail. It would be helpful, therefore, that none gets into too much trouble any time soon – hence the need for strong supervision. High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. Prioritising competitiveness is precisely what led to lax regulation. This in turn set the stage for recklessness on a stupendous scale. So before taking the banks off the “naughty step” it would perhaps be worth recalling what put them there in the first place. Finance Watch, a non-partisan advocate for sound financial reform, maintains an expanding list of banking “misdeeds”. The number of entries has just topped 100. It makes for sobering reading. It is important to connect the dots. The crash and its aftermath have cost the economy, business, UK Treasury and bank shareholders far more than any benefits gleaned from soft-touch regulation. The competitiveness gained proved both illusory and short lived. Finally, it is not a zero-sum game. Why do bank boosters presume there is a trade-off between a soundly regulated banking system and one that is competitive? In a post-2008 world, would you not prefer to do your international banking in a well-capitalised, stable and high-standards regime? And, with a banking sector still equal to four times UK gross domestic product, can the people of Britain tolerate anything less? Perhaps the time for bank-bashing is over. But it is far too early to engage in financial amnesia. That will come soon enough – when the next generation takes the helm. Courtesy The Financial Times