Chancellor Alistair Darling finally produced his long-awaited White Paper on banking regulation at lunchtime today, and as expected, outlined plans for tighter capital constraints, curbs on banker bonuses, more powers for the regulators and so on. But although the City won’t exactly welcome these measures with open arms, at least they won’t come as a shock (since they’ve been all over the papers for weeks). Others will feel that it could have been an awful lot worse. And since some of this stuff will need to be signed off internationally, while the current regulatory regime will be dismantled next year if the Tories win the General Election, today’s Paper may not actually change an awful lot...
Let’s start with the headline bank-busting measures. As expected, the White Paper argues for banks to cap their lending and build up bigger capital cushions in the good times, so they have more protection when the economy goes south. Darling also wants bonuses be linked to ‘long-term stability’, as opposed to ‘short-term profits’, and for non-execs to be more independent and critical. And he also had some (pretty woolly) thoughts about how the current tripartite system of the Treasury, FSA and Bank of England will enforce this, including a Council for Financial Stability to manage long-term systemic risk.
The good news for the City is that Darling has rejected the idea that banks shouldn’t be allowed to grow too big, on the not unreasonable grounds that even relative minnows like Northern Rock can still cause chaos to the system if they collapse. Nor will he force them to split their investment and retail banking arms – although the White Paper did talk a lot about greater competition and protection for consumers, possibly including ‘health warnings’ on risky investment products. Darling also intends to make banks plan for the possibility of being wound down.
In general though, the Chancellor’s speech was heavy on good intentions, and light on concrete proposals. Given that some of the largest banks operate cross-border, any system for winding them down would have to be agreed internationally – which is hardly going to happen overnight. Even the UK-specific measures may not kick in until after next year’s General Election, and if the Tories win, they might well start from scratch. George Osborne – who described it as a ‘totally inadequate response… more of a white flag than a white paper’ – has already promised to tear up the tripartite system if he makes into Downing Street, arguing that current responsibilities remain totally unclear.
And really, that's Darling (and Labour)'s problem: many people in the City don't expect him to be in the job this time next year. So in the circumstances, it’s hard to see this White Paper making a massive difference...
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