Q&A: what regulation means for banks

Banks were at the heart of the financial crisis and are now the subject of efforts in the UK and internationally to improve their regulation. The big question is, can we punish the banks without damaging the economic recovery we need?

Banks duck the punches

The vital topic of bank regulation has dominated financial news in the past week with four separate initiatives in response to the banks’ role in the financial crisis.

So far, banks appear to have avoided tough punitive measures. The key question underlying all the activity is, can we punish the banks without damaging the economic recovery?

Bruce Packard, banking analyst at Seymour Pierce, said: ‘The goal posts have gradually shifted as politicians and regulators weigh up the costs and benefits of restricted lending versus preventing another crisis.’

What has been announced?

In the UK the emergency budget hit the banks with a £2 billion annual levy to discourage them from undertaking some of the high risky lending and speculation they did previously. Not only was this less than expected, the financial impact of the levy will be offset by the cut in lower corporation taxes.

Chancellor George Osborne had earlier decided to give back to the Bank of England direct responsibility for banks operating in the UK. In a big shake-up of the City,  the existing regulator, the Financial Services Authority, will be abolished.

The Bank of England financial stability report said banks had reduced their dependency on the money markets for funding. This is a good thing since it means their lending is financed from more secure sources of capital. A key factor in Northern Rock's collapse was it had too few deposits to match its liabilities.

The Bank also expressed concern about the need for banks to refinance as much as £800 billion in borrowing that falls due next year. With banks still reluctant to lend to one another and concerns about the economic outlook that could mean higher costs and eat into sector profits.

Debate has raged in the UK over whether banks should be split between high risk ‘casino’ investment operations and safer high street retail operations to protect taxpayers and depositors.

In the US, the Financial Reform bill imposed some new rules on US investment banks about how they could invest their own money, abot mortgage underwriting and about bank finacing but was less stringent than was originally been planned. Critics fear the decision not to reintroduce the rule banning banks from combining investment and retail banking will mean more casino style banking in the future.

The law's authors said there was no need for a return to those rules as in future the government would not need to bail out 'too big to fail' banks.

Meanwhile the G20 meeting in Toronto dropped plans for a global bank tax and delayed new rules on requiring them to hold more capital. Global leaders could not agree on what were the appropriate levels of capital and worried new rules could prevent banks from lending more.