Regulation-lite, by Tony Travers

9 Jul 09
Chancellor Alistair Darling’s quiet revolution in City regulation turned out to be, well, quiet

Chancellor Alistair Darling’s quiet revolution in City regulation turned out to be, well, quiet. As the dust settles on the chancellor’s white paper proposals to strengthen the oversight of financial services, particularly big banks, it is clear how limited was his room for manoeuvre. Despite the near collapse of the global banking system last autumn, finance ministers still find it hard to spell out how in future they would tame ‘booms’ by regulating bank lending, indebtedness and remuneration.

The main problem is that dynamic, risk-taking banks are seen as an essential part of wealth creation within western economies, particularly in Britain. For 20 years or more, the gleaming towers of the City of London have been seen as the country’s most successful economic sector. Growth and ingenuity in the financial industry has had profound implications for the public sector.

Hospitals, schools, waste plants, roads and prisons have all been built using the Private Finance Initiative. The PFI was, by any standards, a City product. Complex property deals have required fascinating new ‘instruments’ to allow them to proceed. Indeed, much regeneration has relied on the uplift in property prices that, in turn, created the conditions for the recent crash.

Too much banking regulation would risk slowing down future economic growth and reducing necessary risk-taking. On the other hand, lax regulation risks a repeat of last autumn’s near cataclysm. Public services will be affected by the regulatory balance the chancellor (or his successor) strikes. For the time being, Darling is still tending towards the ‘light’ end of the regulatory scale.

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