Bank regulators finally realise their decisions can help or hinder the economy

Anthony Browne
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WHAT was that bang? A lot of people are hearing the sound of stable doors being slammed shut after the horses have bolted. Professor John Kay – a trenchant critic of banks – wrote about it yesterday, saying that, after the financial crisis, it was natural for politicians to rush to solve yesterday’s problems.

One of the main challenges in the wake of the crisis is that, if banking reforms are introduced too soon, they may make the economic downturn even worse than it need be. Yes, reform needs to be enacted. But policymakers must take into account the fact that the biggest challenge facing the UK and Europe over the next few years is getting the economy back on its feet. Banks want to be able to play their part in promoting economic growth: helping businesses and individuals meet their financial needs is what banks are there for.

This argument finally seems to be winning ground, with, for example, the government including the growth objective into the remit of the Financial Policy Committee (so it doesn’t aim for the stability of the graveyard). The Bank of England’s willingness to accept a wide range of assets in its Extended Term Collateral Facility and the introduction of the Funding for Lending Scheme reflect a recognition that its decisions can either help or hinder recovery.

I was also heartened when the Irish presidency of the EU – which started last week – told me it will “growth proof” the dozens of bits of financial services legislation going through Brussels. The reforms that promote growth will be pushed forward; those that harm growth will be pushed back.

It was welcome too that the Basel Committee last weekend decided to revise the Liquidity Coverage Ratio in ways that will help growth. Too strict an application of the rules – such as the definition of what assets banks need to hold to meet their liquidity requirements – would limit banks’ abilities to finance the wider economy.

Allowing the inclusion of good quality retail mortgage backed securities (RMBSs) should reinvigorate the securitisation market, which has been moribund since the beginning of the global financial crisis, as all RMBSs were tarred with the same sub-prime mortgage brush. As a result, banks will be better able to manage their balance sheets to make space for lending to businesses. It should also ultimately help homeowners, by encouraging more long-term investment from insurance companies and pension funds in the mortgage market. Delaying the date that banks need to fully comply to 2019 should ensure the economy gets less kicked when it is down.

Banks are the lifeblood of the economy. With the support of policymakers, they will be able to play their part in generating growth. Hopefully that way 2013 will be better than 2012, not just for banks but for the whole economy.

Anthony Browne is chief executive of the British Bankers’ Association.

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