The UK regulatory pendulum has been halted in mid-swing.
The direction of travel for bank regulation in recent years has clearly been in the financial services sector’s favour. Aided by a government eager to find benefits of post-Brexit regulatory freedom, there has been a sense of opportunity to tweak or modify, to strip off gold-plating or at least remove some of the shine.
This was epitomised by the return of “international competitiveness” as an objective for watchdogs, a concern that was struck from the regulatory remit after the last financial crisis. The comeback was limited to secondary status behind priorities such as consumer protection and safeguarding the system. But it reflected some loosening of the regulatory vice around the banking sector after the global financial crisis.
Not any more. The mayhem that started with Silicon Valley Bank in the US and resulted in this weekend’s forced sale of 167-year-old Credit Suisse to arch-rival UBS will put a stop to that shift. In good times, the idea of “competitiveness” of banking regulation is used to carp about domestic strictures hurting the industry compared with other markets. In bad times, that turns on a dime: a competitive banking jurisdiction is the one where institutions are left unsullied or still standing.
Banks fail for a variety of reasons but are universally awful to deal with when they do. The interest rate shock that did for Silicon Valley Bank was compounded by the Trump-era loosening of regulations on banks with under $250bn in assets — a “huge error” in the words of one regulatory expert. The UK’s promised regime for smaller lenders, known as Strong and Simple, only includes domestically-focused banks with up to £20bn in assets. Still, the idea that small to midsized banks should get an easier ride is likely to meet renewed resistance.
Credit Suisse, on the other hand, managed to scandalise itself out of existence, to die from embarrassment. It had lurched from one humiliating crisis to another, be it Greensill Capital, Archegos, “tuna bonds” or being forced to delay its results following a call from the US Securities and Exchange Commission. In an environment where the market was looking to attack banking’s weakest link, its investors and customers just lost faith in the bank — operationally, culturally and managerially.
The bank had plenty of capital and liquidity, on current regulatory demands. But those who have long argued that banks by their very nature need much higher capital requirements still, like chair of the post-crisis Independent Commission on Banking John Vickers, may feel vindicated. Tools that give regulators leverage over banks’ internal processes and management, such as the UK’s senior managers and certification regime which is under review as part of the government’s Edinburgh reforms, won’t be given up or watered down without a fight.
Reforms that rely on the idea that post-crisis adjustment has made big bank failures manageable feel rather doomed. No matter how much work has been done on bank resolution, when push comes to shove regulators and politicians have balked at the prospect.
Critics of the UK’s ringfencing regime, which legally separated domestic consumer deposits from riskier investment banking activities, have argued that progress on resolution had rendered it unnecessary (as well as that it created less diversified entities that are less resilient). The first looks at best unproven. And the second must overcome the idea that ringfencing still gives regulators and politicians more options when things go wrong. “You don’t have to be a big fan of ringfencing to recognise that it gives you rather more control over what happens in a crisis,” says one former regulator.
Ultimately, the power has shifted back towards regulators like the Prudential Regulation Authority, which last year was overruled on crucial insurance rules by a government wanting to plant its Brexit dividend flag. That will help it see off wailing about its by-the-book proposals for implementing Basel IV rules, as well as giving ample scope to move slowly on other reforms should it choose.
Of course, rules can be tweaked and oversight made more effective without compromising high standards. But those who argue that robust and unyielding regulation is, through the cycle, a competitive advantage in banking now have the whip hand over detractors.