- Bank of England gets back financial regulation. - Matt from London
Given the depth of the current economic crisis, and the role the financial services (FS) sector played, or has been perceived by the public to have played, the new British government must proceed with an urgent reform of the sector. However, because of the importance of the FS sector to the overall UK economy, that job will not be easy. The new Tory-Lib Dem coalition government will have to find the right balance between reforming the sector and addressing public’s discontent over its role in the current difficulties on the one hand, and preserving the jobs and revenues the sector creates on the other.
The main question is how much, and what kind of, regulation is needed in the current climate. Here, the government has to tread a fine line between tightening control in order to prevent a possible repeat of the credit crunch, and stimulating the flow of money the economy desperately needs. This is not just an economic dilemma, but a political one too. The public, angry over bankers' bonuses at a time when the taxpayer had to cough up the money and save failed banks, wants to see something done. At the same time, that ‘something’ should not lead to job losses in the FS industry, which is crucial in oiling the economic recovery.
Financial Regulation Goes Back to the Bank of England
The new government has taken the first step by announcing in the Queen’s Speech that financial regulation will be put back in the hands of the Bank of England. Although full details are not yet known, it seems the decision does not go all the way towards abolishing the Financial Services Authority, which under Labour shared the task of regulating the financial services sector with the Bank of England and the government. This reflects another serious challenge for the new government - internal balancing between Tory and Lib-Dem ideas on what to do and how far to go.
Banks may be Broken Up
Another key proposal unveiled in the Queen’s Speech is the establishment of an independent commission to look at breaking up banks into their retail and investment arms, in order to reduce risk. Here, the government will face resistance from the bankers themselves. Peter Sands, chief executive of Standard Chartered, was quoted by the Guardian as saying that setting limits on the "size and scope" of banks "simply won't work".
The government is also thinking about forcing banks to hold more capital, but again the bankers are getting ready to fight back. It has been reported that they are preparing research that would show that such proposals would have "significant impact" on the global economic recovery.
UK Against EU Over Hedge Funds
Finally, the new Tory-Lib Dem alliance faces a challenge to fight against more, rather then less, regulation. European Union finance ministers have agreed to introduce tougher regulation of the hedge funds industry, against the objections by the new UK government. While most EU governments want closer scrutiny of hedge funds, blaming them for speculative actions during the current crisis, the British government is worried about the impact of the regulation on the European hedge fund industry, 80% of which is based in the City of London.
Sources:
The Economist:Good News for Hobbits (May 13th 2010)
The Economist: Britain's Phoney War Over Hedge Funds (May 18th 2010)
The Guardian: Standard Chartered Boss Says Banks Should Be Allowed To Fail (March 4th 2010)
Aleksandar Kocic - I have worked as a journalist for over twenty years. My first job was with a local radio station in my hometown of Pancevo, Serbia, where ...
