Can you Bank on the Government?

Lets face it, Financial regulation is in a mess. For too long the government has been happy to sit back and do a bit of political tweaking here and there, but no more. Lord Myners, City minister, crumbled at the Treasury committee meeting after the government published their White Paper on financial regulation. This was seen as a missed opportunity and lacked any real substance. Is there anyone who can regain stability to a fractured financial system?

I thought Shadow Chancellor George Osborne’s approach to financial regulation was a bold and courageous one. Despite what the critics say about instigating ‘turf wars’, someone has to pick up the pieces of the failed tripartite system, introduced by Gordon Brown 12 years ago.

Responsibility for financial stability in the UK is shared by HM Treasury, the Bank of England and the Financial Services Authority (FSA). They constitute the “tripartite authorities”. However, the system failed to foresee, or protect against the financial crisis. Hence, Mr Osborne had no choice but to suggest radical reforms in order to regain trust and confidence, which has been hit hard since the recession.

The government’s approach has been lacking in substance. Its proposals for a Council for Financial Services lacks the rigour and executive power it would need to be effective. It would just be a ‘forum’ for debate and would still rely on the tripartite system. Same old government, same old system.

The Conservatives on the other hand have real meat on the bone. They have explained the sort of tools regulators will have in order to fulfill our economic objectives. Accordingly, there are proposals for caps on leverage, capital requirements and limits on interbank lending.

But what really sets the Conservatives apart is their policies on banking competition. They believe that competition must be restored as soon as possible. The UK, which so heavily relies on its financial services, can ill afford to be uncompetitive in the international banking arena.

What we need to survive this crisis is a competitive, but accountable banking industry. This is something which is at the core of George Osborne’s proposals. He suggests breaking up the banking monopolies and encouraging the formation of smaller banks. This is why the Conservatives plan a new Consumer Protection Agency.

This is no time for policymakers to play the nice guy. What we need is not more regulation, but more effective regulation. The governments proposals simply move the financial furniture around. This is no remedy for long term recovery.