The UK has been consistently ahead of the curve on financial regulation.
Higher leverage ratios, stress testing, structural reform, the division of Pillar 2, securitization transparency, subsidised SME net lending, statutory bail-in debt, buying corporate bonds, emergency whole loan repos – the Bank of England did not invent all of these, but all were publicly adopted in the UK before broadening out to European level central banking, regulation and supervision.
That’s why it’s concerning that the UK appears to be, once again, going back to the drawing board. The cause is a public argument between John Vickers, who chaired the UK’s Independent Commission on Banking, and Mark Carney, the governor of the Bank of England. Vickers wrote an op-ed in the Financial Times claiming the Bank of England had softened its recommendation; Carney offered a detailed rebuttal.
Now Andrew Tyrie, head of the Treasury Select Committee, and the Parliamentary scourge of the bankers, wants to investigate bank capital levels, raising the possibility that the UK could redraft capital rules for its banks.
This is not an idle threat. Tyrie is a highly public figure who seems to relish his discretionary powers to investigate aspects of the financial system. It is Tyrie, in his previous incarnation at the Parliamentary Committee on Banking Standards, who drove the creation of the new UK “Senior Managers’ Regime”, and the Banking Standards Board. It was Tyrie’s grilling of Bob Diamond that encouraged Barclays onto its path of shrinking the investment bank, and it is Tyrie’s pressure that has shaped the UK’s post-Libor benchmark rules.
As the Guardian, a left-wing newspaper in the UK, said: “We need you Andrew Tyrie. Without you, then bankers will get away with it.”
But sheer regulatory fatigue ought to mitigate against further changes to the bank capital framework, in the UK and elsewhere. A continuously changing set of rules makes the world more complicated and dangerous. Better to have certainty now than be nipping and tucking capital rules indefinitely.
Consistency and stability ought not to be valued more highly than getting regulation right, but they do have some value, and long-term instability, in particular, is dangerous.
Whether the leverage ratio is 3%, 5% or 10%, if it remains consistent, measured using a standard set of rules, banks can work with it. A 10% ratio might result in a massive contraction in lending and the financial system, but if that’s the trade-off the public wants, then so be it.
What can’t work well is a system which plans ever-increasing “final” capital targets, with repeated revisions to the base of calculation, elaborate transitional rules between interim rules and “fully loaded” capital ratios.
It’s not just leverage ratio, of course. The targets are still moving in a huge range of areas, with regulations including TLAC, the standardised approach to credit risk, the internal model-based approach to credit risk, the fundamental review of the trading book, and the standardised approach to operational risk all in a state of transition.
Bank management must adapt to all of the capital rules already on the statute book, while anticipating all the rules to come, as they slide from proposal to consultation to impact study to final rule to national implementation.
That doesn’t leave much time for figuring out how to make money, how to upgrade technology, or how to take prudent credit risk, and it doesn’t give bank investors and external analysts any certainty about the real, underlying performance of an institution. Regulatory change is having more effect on banks than whether they're any good at banking or not.
The Basel Committee has committed to having final rules for all of its projects by the end of the year though — meaning a light at the end of the tunnel for most firms. The transitions will surely take years, but at least the targets ought to have stopped moving.
For UK-regulated firms though, a new review from someone as influential as Tyrie means the tunnel just got longer. Hearing evidence, writing a report, recommending to Parliament, responding to draft rules and implementing any changes — the UK should have its new capital regime by 2019 or so, in time to inspire the drafts for Basel V.