Not so long ago

Prof. Philip Booth: We need a revolution in financial regulation

It may surprise many that, until recently, banks did not have their capital regulated. Of course, before 1979, neither banks nor their customers had any expectation of being bailed out – market discipline prevailed. The history of banks’ capital positions is interesting. During the post-war period, banks were pressurising the Bank of England to allow them to hold more capital – they were prevented from doing so because the government and the Bank of England believed that, if the banks raised more capital, there would be less capital available for the non-financial industries. Banks exposed to market discipline were conservative institutions. I wonder if the post-1988 regulatory binge has really achieved anything positive.

Regulation has run riot and so did the banks. Last year alone there were 14,200 new banking regulations worldwide and the US Dodd Frank Act will contain around 30,000 pages of regulations. Furthermore, there is a real danger, when regulation becomes as complex as it is today, that it is only understood by a clique both in government and in the industry. That is a recipe for regulatory capture – in other words, the controlling of the regulatory system by the companies that are being regulated. The approach of the UK government which is trying to create a legal framework so that banks can be wound up safely is to be applauded, but this should replace and not be added to existing regulation.