The government’s White Paper on banking regulation will be based on a toxic mixture of misunderstandings and the wish to deflect attention from the mistakes the government and monetary authorities have made.
The main cause of the Credit Crunch was the boom and bust monetary policies followed independently by the UK and US authorities 2003-9. In 2003-6 they kept interest rates too low and sent signals that credit should be easy. In 2007-8 they pushed rates up too far and left markets short of funds. Today there will be no apology and no proposal on how they can start getting it right in the future.
The crash was made worse in the UK by the tripartite system of regulation. The authorities did not require enough cash and capital of the banks in the easy money years, though they had the powers to do so. Now they are demanding too much. The Chancellor failed to provide leadership to read the cycyle well and to prevent the banking crisis. The Bank of England, stripped of its powers to regulate the banks, was unable to stop them responding to its easy money policy by lending too much and overstretching balance sheets.
The government encouraged the easy money off balance sheet culture. In the UK it encouraged massive PFI/PPP schemes so it could join in with oiff balance sheet finance. It enjoyed the never never buy now pay later culture. In the US the administration encouraged sub prime lending.
The UK government will be right to say “No” to trying to separate investment and clearing banking. It is right to say in future regulators should dampen rather than intensify the cycle.
It is wrong to trust the tripartite system which has failed. It is wrong to want to keep the mega banks that it now owns. It is wrong to ignore the monetary origins of the crisis. It should split up RBS and LLoyds/HBOS for disposal. It should apologise for its boom and bust monetary policy and explain how in future it might get it right.
Why should we believe new and more regulators will get it any more right than the last lot?