Compare and contrast:
“Our financial services industry in Britain has, in recent years, been seen as part of the problem – now it must become part of the solution.” – George Osborne, Chancellor, at the Mansion House Dinner 2015.
“I am going to deal with abuses, tackle the unacceptable behaviour of the few, and ensure that markets are fair for the many who depend on them.” – his Mansion House Speech 12 months earlier.
Much has happened in the last year – notably the general election – but that does not account for this big change of tone. More particularly it is global economics – the threat of deflation as the Chinese economy slows, the US economy recovers patchily and the eurozone stagnates. Consider against this background, and the UK goods deficit, the success of the UK financial services industry. “The UK is the leading exporter of financial services across the world. Its trade surplus of $95bn in 2014 was more than twice the next largest trade surplus, recorded by the US.”– TheCityUK. Can UK politicians afford to risk this income stream (and tax revenue)?
How is this relevant to financial services regulation? It is because the wave of G20 mandated reforms are depressing activity across the sector. This includes the funding of small and medium-sized enterprises – the major source of employment growth as governments cut employees – for example through higher capital and liquidity requirements for banks, and bank separation in different countries.
So what are countries doing about the threat of stagnation, even deflation? The EU sees the Capital Markets Union as its salvation and has given it strong priority; in the US the debate over the Trans-Pacific Partnership raises controversy, and the Republicans try to roll back some of the Dodd-Frank reforms; and globally the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB) worry about the unexpected consequences of stronger bank regulation in promoting the growth of ‘shadow banking’ (which is lightly regulated or even unregulated), and of the drying up of liquidity in key markets such as for government bonds (and their consequent price volatility) after the withdrawal of investment banks as market makers.
The recent decision by the FSB not to make asset managers globally systemically important, shows that governments are supporting the financial services industry for the first time
So where are we on the regulatory cycle? Six years on from the global crisis, most of the G20 Pittsburgh reforms have been made and are gradually coming into force; only “too big to fail” is a work in progress (according to the Governor of the Bank of England). So have we reached the tipping point when the pendulum swings back? Probably – the recent decision by the FSB not to make asset managers globally systemically important, shows that governments are supporting the financial services industry for the first time. They do not want to put insurers’ long-term investments in infrastructure and government bonds at risk. If this is right, the next steps would be an actual rolling back of some of the recent reforms – in securitisation, Solvency II, liquidity, financial buffers and mortgage risk weighting, and in the transparency and mandatory market execution and clearing regimes under the amended Markets in Financial Instruments Directive (MiFID II), the European Market Infrastructure Regulation (EMIR) and Dodd-Frank (how well do Swap Execution Facilities actually work?).
Such a swing back inevitably carries risks of a future global crisis. This may well be the price for future economic growth. It is depressingly clear that you cannot have both safety and growth, as IMF reductions in global growth show.
This article was originally published in the August 2015 edition of Change.
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