On both sides of the Atlantic politicians are out preaching their favourite syllogism. Regulation stops crises. Existing regulation did not stop the crisis. Therefore we must have more regulation. All round the world they are also looking for politically easy ways of getting their hands on even more cash to spend, and to fill some of the holes in their budgets. The banks are an easy target for both these impulses.
The banks are very unpopular. The retail side of them can give a poor service as customers see it or thwarts the legitimate aims of their customers. The banks do not seem to be shy when it comes to charging. The investment wings of the banks pay large salaries and mega bonuses which makes many people jealous. When the banks through their own poor management or through the clumsy interventions of the regulators need to come to the taxpayer for loans or even subsidy the public blood can understandably boil over.
We should also ask how well based all this belief in certain types of regulation is? There was no shortage of rules and laws when the US and UK banks got into difficulties in 2008. The problem as we have often discussed was the regulatory judgement – the leading regulators of the US, UK and some other leading countries saw nothing wrong with the low levels of cash and capital banks had relative to their huge loan and derivative books. It turned out both the regulators and the bankers were wrong.
The same issues arise over the regulation of European airspace. Why was it unsafe to fly last week and perfectly safe to fly this week? What changed? The wind direction did not change, and the volcano is still smoking. Was the regulatory response proportionate last week, and is it safe enough this week? Why was there such a sharp downward revision in safety margin?
The consequences of regulatory mistakes can be huge. The aviation industry suffered huge losses and their passengers were put through great inconvenience and misery. The gross failure of the monetary and banking authorities in the period 2005-10 has caused large job losses and loss of income throughout the western world. Of course it took two to tango – some bank directors and senior managers made big errors within the regulatory framework and rules set for them.
The question to ask now should be what tax and regulatory regime will help the recovery. Tempting though many may find it to seek revenge on the bankers, we should instead have two preoccupations – a strong economic recovery and getting the taxpayers money back form the banks that did take subsidy or where the taxpayer owns shares. These two aims require the same response.
Any tax increase on banks reduces the amount of cash and capital they have, and therefore cuts the amount of lending they can do to fuel the recovery. Higher taxes may also lead to higher fees and charges as banks seek to rebuild their profit and cashflow against the fiscal headwinds. In the end it is we the public that pay these taxes.
Regulation and monetary policy today is contradictory. The banks are told they must lend more, and the monetary authorities keep their indicative interest rates very low. Meanwhile the Regulator demands too much extra cash and capital for this stage of the cycle, preventing the banks using the access to cheap money to lend on to the private sector to speed the recovery.
Policies made out of popular anger against a given group are often not wise. The current vogue for more tax and regulation of banks panders to the popular mood but delays the recovery.
Promoted by Christine Hill on behalf of John Redwood, both of 30 Rose Street Wokingham RG40 1XU