The UK government's plans for regulatory reform in the financial sector seem to have impressed nobody. Both of the main opposition parties favour returning the prime responsibility for regulation to the Bank of England, but the government wants to persist with the so-called "tripartite" system. In fact, you could say it wants to make it even more complicated, with a co-ordinating body to be set up to ensure that the Treasury, Bank of England and FSA work together.
I'm agnostic about the tripartite system and doubt whether the hiving-off of the FSA had much to do with the recent crisis. There's no reason that a free-standing bank regulator can't work perfectly well. For example, Canada's big banks have been almost unscathed by the global credit crisis, and they're regulated by a single-purpose body (The Office of the Superintendent of Financial Institutions, or OSFI) rather than by the Bank of Canada.
If simplicity was the key to successful financial regulation, as the opponents of the tripartite system seem to believe, Canadian markets would be in a state of perpetual chaos. As well as the Bank of Canada and OSFI, each of the ten Provinces has traditionally maintained its own securities commission. But it all seems to work, at least well enough to avoid most crises and to deal promptly and effectively with those that do occur.
The biggest event in Canadian banking in the last fifty years was something that didn't happen. In 1998 four of the big five banks announced plans to merge: Royal Bank with Bank of Montreal and Toronto Dominion with CIBC. Both pairings argued that they were too small to compete internationally, an argument that was rather undermined by the fact that at the time, each bank was using big chunks of its existing capital to finance repurchases of its own stock. The Government had no advance warning of the plans, but kept the banks waiting for almost nine months before announcing its decision: the mergers were not in the public interest and would not be allowed to proceed.
You can agree or disagree with that decision (and at least up until the start of the credit crunch, senior bankers would still moan about it regularly) but it clearly showed the determination of the government to maintain a high degree of national influence over a key sector of the economy. It's impossible to imagine any UK government for the last two decades or more taking a similar step. Politicians and regulators alike have appeared to be in thrall to the City of London, regularly extolling (and even trying to take credit for) its undoubted success as one of the UK's few world-class sectors.
There was some tough rhetoric about cracking down on the perceived excesses of the banks and hedgies and all the rest in the early days of the credit crunch. However, I don't see much evidence of follow-through in the government's proposals. Politicians are still in awe of the big money types and fret about driving away the perceived wealth and jobs that the City brings, despite the explosion in the other side of the ledger in the past two years: the tens of thousands of jobs shed by the banks themselves, the destruction of jobs throughout the economy as a result of the drying-up of credit, and of course the potentially huge cost of bank bailouts to the public purse.
Most of the activities in the City have very little to do with the UK economy, but there's no denying that the jobs and wealth they bring are very welcome. Before the credit crunch, the City had grown too big for the UK economy, but when the crunch came, this meant that the whole edifice was too big to fail. There's very little sense in a financial regulatory system that puts the domestic banking system at risk when investment banks overstretch themselves internationally. The Canadian government, by luck or good judgment, kept its domestic banks out of trouble by refusing mergers that would have allowed them to go head to head with the big international banks. Right now, the UK government needs to take a comparably bold step by separating bread-and-butter day-to-day banking from investment finance. By all means have a regulatory regime that encourages financiers to set up shop here, but don't do so in such a way as to put domestic financial stability at risk.
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