The UK and the US are taking very different regulatory stances, the former reverting to its characteristic light-touch while the latter is taking a heavy-handed approach, but both regimes are driven by political considerations rather than market needs and are therefore at risk of damaging their respective banking systems.

At the end of the day, regulation is an intensely political affair. The UK government’s decision to consider giving Chinese state-owned banks the privilege of operating as branches rather than full-blown subsidiaries is seen by some as creating an unlevel playing field in pursuit of an economic aim. The announcement was made by UK chancellor of the exchequer George Osborne during a trade mission to China.

Clearly, if London wants to be an international centre for the renminbi it needs the Chinese banks to have a stronger presence in the City. Previously, they have indicated that Luxembourg may be a more favourable European location due to a better regulatory climate.

Since the crisis the UK regulator – now the Prudential Regulation Authority – has been urging foreign banks to set up as separately capitalised subsidiaries rather than thinly capitalised branches where the overseas regulator is expected to pick up the pieces if something goes wrong. In the case of the Icelandic banks with overseas retail operations, this plainly did not happen and the UK taxpayer was left with the bill.

Supporters of the move say that this is the only way to make the UK attractive to the Chinese banks and that it does not involve retail operations, only wholesale business. Critics fear the return of light-touch regulation in London at a time when US regulators are going the other way by forcing foreign banks to set up as fully capitalised units.

If the regulations themselves can be adapted to business imperatives how much more arbitrary are the fines dished out when things go wrong? The $13bn fine tentatively agreed between US state and federal authorities and JPMorgan for the mis-selling of mortgage-backed securities would be the largest fine imposed on a single US company.

It is difficult to understand how that specific amount was arrived at and very little account seems to have been taken of JPMorgan’s role during the crisis in rescuing Bear Stearns and Washington Mutual. The majority of the settlement relates to the activities of these two banks before JPMorgan acquired them, and at the same time the firm was encouraged by the government to do these deals. This outcome seems more to reflect a political situation in which banks are unpopular and considered fair game than as a result of a proper assessment of their misdemeanours.

To be successful, regulatory standards need to be more scientifically based and less determined by where we are in an economic or political cycle. Both extremes – too harsh and too lenient – should be avoided. One hope is the work being done on resolution and recovery which now has its own jargon – single entry point and multiple entry point.

Banks adopting the first regime will be indicating that they are structured in such a way that the home regulator takes charge, and problems, wherever they occur, are sorted out at the holding company level. By contrast, multiple entry point banks will have all their subsidiaries separately capitalised and the host regulator will be in control.

By allowing the Chinese banks to establish branches, Mr Osborne is implicitly saying that the Chinese regulator will bail them out if anything goes wrong. Let’s hope he has got it right. 

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter