Fresh from leading a City delegation to UAE and Qatar last week and before I head out to Bahrain and Saudi Arabia tomorrow, I see that the debate on reform of the financial services industry is slowly beginning to shift.
Talk of a global bank tax is rife following Gordon Brown’s declaration that he expects an in-principle deal to be done by the G20 in June. This comes hot on the heels of President Obama’s $117bn (£72bn) levy in the US and outlining radical industry reforms, including plans to limit the size of financial institutions.
So instead of focusing on bonuses, policy makers are now turning their attention to broader regulatory issues, particularly capital and liquidity adequacy, as they attempt to reduce systemic risk.
But the proposals currently being bandied about are far from perfect.
A Glass-Steagall separation of investment and retail banks would have done little to help the likes of Northern Rock, HBOS or RBS. Big banks are not automatically riskier than small banks. Therefore undermining the efficiency of the City by shrinking financial institutions could be a self-defeating exercise.
Sorting out the capital and liquidity issue is critical; a sound solution to this will also deal with the “too big to fail challenge” without going down the Glass-Steagall route.
We must get this right. A failure to do so will have serious consequences for the cost and availability of credit. This could lead to less lending – depending on the size and nature of such limits – as well as another downward spiral in property prices due to a lack of mortgage funding.
At a time when the fragile global economic recovery is threatened by burgeoning fiscal deficits, we can ill afford to constrain growth in the financial services sector through excessively punitive measures.
New regulation must be carefully considered and targeted in order to avoid potentially serious unintended consequences. A fine balancing act needs to be struck between curbing unnecessary risk-taking and allowing the industry to do business effectively. This has yet to be achieved.
During this crisis, it has been politically expedient to blame the banks as the sole architects of current economic woes and the public are understandably angry. But this has led to the regulatory environment becoming clouded by uncertainty as the US and the UK, among others, have outlined populist policies outside the G20 process.
Personally, I hope the summit in June will mark a return to closer cooperation between leading economies. London is Europe’s international financial capital and our banks operate in an international marketplace for business and talent. Leaders in the EU and beyond should recognise this fact and engage with industry to deliver a unified vision on reform through the G20 forum.
Nick Anstee is the Lord Mayor of the City of London