Acting alone ignores interconnectedness

Governments of all persuasions have taken credit for the ­benefits that a liberalised banking system has brought to their economies. Yet, now that those economies are in difficulties, it is all the banking industry’s fault.

If a bank has a problem now, it is a political issue; and if it has retail customers, it is a highly political issue.

I am too much of a realist not to recognise that some regulatory changes are bound to be made, irrespective of whether they are necessary. But it is essential that the classic reaction by individual regulatory authorities is avoided. The credit crunch and its attendant problems are global phenomena and they need global solutions.

The UK is the only major financial centre in the world that is governed by two masters: the UK authorities and those based in Brussels. Most of the policy decisions that impact upon the UK financial markets are now taken by the institutions of the EU. Therefore, the problem that the British Bankers’ Association (and the UK) has is to try to ensure that the compromises made among the EU’s 27 member states do not hit Europe’s financial powerhouse – London.

Visible review

The UK had a very visible problem in the early stages of the current credit crunch: the pictures of what was effectively a run on Northern Rock were beamed around the world.

Such a visible problem needs to be the subject of an equally visible review and that is exactly what happened in the UK.

Many other financial centres have had problems and will have problems: Germany has two banks in difficulty and is subject to a state aid inquiry; the US got into spectacular difficulties with Bear Stearns; France has its problems and so has Switzerland.

What characterises the UK’s response to these ­problems is that the subsequent investigations into how the problem arose all took place in full public view and the Financial Services Authority put into the public domain a critique of its shortcomings, which few, if any, other regulators would be prepared to ­publish.

The right response

Now we have to prepare for a proportionate regulatory response. Precipitate action can drive business away: one only needs to look at the effect of Sarbanes-Oxley in the US, or the UK’s gold-plating of EU directives on issues such as savings for proof that it does.

The government is set to bring new banking proposals before parliament later this year, following consultation on possibly the largest set of banking changes that the banking industry has ever seen.

But the UK cannot act alone. In addition to the proposed UK changes, the list of issues gathering international support for action includes:

• ltransparency of structured products and prompt and full disclosure;

• better valuations;

• transparency of off balance sheet structures;

• improved risk management; and

• credit ratings and credit rating ­agencies.

A new checklist

All the above issues need to be tackled on a global level. So I propose another checklist. As we shift our regulatory requirements, at the forefront of the policy-makers minds should be the following:

• Any changes must result in a regulatory framework that is secure and which means that where there are multiple regulators – and most countries have multiple regulators – they work together in harmony in a well-connected and well-co-ordinated, no surprises regime;

• The regulatory framework must be manifestly fair to consumers;

• The framework must allow innovation;

• The framework must reflect and encourage international competitiveness.

One thing that this credit crunch has demonstrated clearly is that all of our markets are interconnected: some to a greater extent; others to a lesser extent – but interconnected they are. Any regulatory changes that are made need to be made in harmony and implemented on a sensible, equivalent and timely basis.

Angela Knight is chief executive of the British Bankers’ Association.