Regulation, regulation, regulation

My latest post at Pieria is the second article from the ICAEW's recent conference on the Future of Banking. It reviews the scope and extent of regulatory change since the 2008 financial crisis, and asks whether we are maybe overdoing it?

Bad behaviour by banks was the primary cause of the 2008 financial crisis. Victoria Saporta of the PRA describes the pre-crisis period as the “partying phase”. Banks increased their leverage, in some cases to more than 60%, which left them very vulnerable to even small shocks to asset value. And they reduced their liquid assets, which combined with their high leverage made them highly exposed to damaging runs. But banks were not the only partygoers: household debt/income ratio grew to over 160%, concealed by low mortgage spreads that did not reflect the true risk of the lending.
In contrast, the aftermath of the crisis is a time of “healing” - repairing damaged banks and fixing the vulnerabilities that existed pre-crisis. Since the crisis, banks have been improving their capital and liquidity positions. There is a popular perception that this has been at the expense of lending to the wider economy, but in fact the global increase in banks’ capital ratios has been mostly driven by accumulation of retained earnings, not by restricting lending. Banks are now in a much stronger position than they were even a year ago.
But it’s not over yet.  Extensive changes are being made to the regulatory environment within which banks must operate. Structural reforms aimed at segregating activities regarded as "risky" from vanilla deposit-taking and lending business are being introduced in the US, UK and Europe. Macroprudential regulations intended to make balance sheets safer are also being tightened: banks already face higher capital and liquidity requirements, and further measures are being discussed. And conduct regulation - perhaps the most intrusive of all forms of regulation and supervision - is taking shape in the UK. 
Read more here


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