Banks need clarity from regulators, not criticism

Anthony Browne
Follow Anthony
DOES the governor of the Bank of England hate banks? You might think it is a rather sacrilegious question, but it is one that bankers themselves are asking, at the very highest levels. It is normal for there to be tensions between an industry and its regulators; indeed as the electricity industry showed in the 1990s, it would be alarming if there weren’t.

But this goes beyond normal. Mervyn King and Hector Sants, head of the Financial Services Authority (FSA), have become the bogeymen of the financial services sector, denounced angrily whenever bankers huddle together.

The banks complain about the aggressive regulatory stance, the unnecessary goldplating and front-running of international regulations, “superequivalence”, the regulators’ thunderings about their sector, and the FSA’s doubts about competitiveness.

It isn’t abilities and judgements of King and Sants that are questioned – the normal critique of the regulated against their regulators – but their psychological state, their motivations and their ultimate aims.

The concern is that they are compromised because financial services imploded on their watch, and they not only appeared not to see it coming, but did nothing to prevent it.

They are embarrassed, traumatised by what happened. They are now engaged in the massive exercise of noisily slamming stable doors shut after several horses have bolted, runs the refrain in the boardrooms of the square mile.

Having seen the boiler explode, they are responding not by mending it but by turning the heating off. Whether or not they are so traumatised they are over-reacting, it is certainly true that in terms of their personal credibility, they have nothing to lose and everything to gain by pursuing a policy of “tougher than thou”. In any trade-off between greater regulation and economic growth, they have a personal incentive to choose greater regulation.

There is one key thing the banks want to know of King and Sants – do they think the financial services sector is too big in the UK? Is their unspoken game plan to try to cut the sector down to size? Has Mervyn been reading too much of Will Hutton’s columns, calling for financial services to be forcibly shrunk?

For international bankers thinking of investing in the UK, it is critical to know the regulators’ long term aims.

Nor is it clear to the industry whether the Treasury – or at least its political masters – share the aims of the regulators.

The government’s priority is to boost growth, and financial services remain one of the best hopes for economic expansion in the coming years. Erring on the side of overzealous regulation may appeal to King and Sants, but it will have little appeal for the chancellor.

All this might just be a terrible misunderstanding between the banks and their regulators. If so, it is a misunderstanding the regulators must try to clear up.

Anthony Browne is on the board of theCityUK