Now that the effects of the crisis are settling, it is time for new, sensible rules to prevent banks from getting into trouble again.

First we had a period of light-touch regulation, which ultimately failed. Then we had a madcap dash to regulate everything that moved. Now we are entering the era of common sense – hopefully.

Governments are waking up to the fact that ‘reregulation’ has starved economic sectors that are critical to growth and jobs of badly needed capital. Infrastructure and small and medium-sized enterprises (SMEs) top the list of areas where funding has become an issue. If the complaint before the crisis was that banks did the easy stuff – lending for mortgages and to big companies – and ignored the harder things – infrastructure and SMEs – then the new rules have entrenched this situation.

But there are clear signs that a rethink is going on. The European Commissioner for financial services, Lord Jonathan Hill, is expected to announce in September a substantial reduction – maybe as much as 25% – in the capital that banks must hold against securitisation.

Securitisation was, of course, rounded upon for its role in the financial crisis, with little attention paid to the fact that it was the poor quality of assets and lack of due diligence that was at fault rather than the model itself. An improved securitisation market would increase the flow of funds to both companies and households.

In an article for The Banker, Lord Hill also identifies the prospectus directive and the treatment of infrastructure as an asset class under Solvency II (the regulations that apply to insurers) as areas ripe for a rethink.

Other things that he might like to consider would be the ‘one-size-fits-all’ approach of the recovery and resolution directive, which treats all banks the same, and new European Bank Authority proposals in limiting banks’ exposure to shadow banking.

The knee-jerk reaction to the crisis must surely now be over. What we need are clear, sensible rules that prevent banks from getting into trouble but do not inhibit them in their critical economic role of maturity transformation based on a professional assessment of risk. 

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