Peter Sands, the chief executive of Standard Chartered, warned that much of the new regulation could “stifle growth” and was contradicting governments’ fiscal and monetary policies that are attempting to support countries coming out of the recession.
“What I most worry about is that in the next cycle, as the regulatory pendulum swings, we are going to have to use taxpayer money to bail out unregulated businesses that, unlike the banks in the last crisis, may not be able to repay them,” he explained.
He said that new regulation was important but there was a major risk of over-engineering the solution.
Gary Cohn, president of Goldman Sachs, warned regulators must focus on the whole financial system, rather than just banks.
Mr Sands comments, made on Wednesday at the World Economic Forum in Davos, are echoed by many banking leaders spoken to by The Telegraph. They said they were losing patience with endless “bank bashing” by politicians and regulators.
A reasonable description of what went wrong is that the shadow banking system suffered a run. What triggered it isn’t all that important: yes, mortgage bonds, a housing bubble, gross overpayment for ABN Amro, these had a part to play.
But the real problem was what this led to: the wholesale markets, that shadow banking system, freezing up and damn near toppling the whole edifice of the financial system. Those stories of ATMs not having cash in two hours time: nothing to do with mortgage losses. They were due to the interbank system, overnight etc, disappearing.
OK, so what was the problem with this shadow banking system? Banking systems, at least fractional reserve ones, which do not have deposit insurance are likely to be subject to runs. Hmm.
But why did this shadow banking system grow up? Because the players in the market were looking for ways to get out from under what they saw as the stifling regulation of the insured and thus regulated parts of the banking system.
They may have been clever or dumb about this, perhaps they should or shouldn’t have done this, but that is one way of describing what had been going on for decades. Not just regulation of course: tax as well. The entire Eurobond market started as tax arbitrage out from under the US system of bond taxation.
OK, so we’ve narrowed down our root problem as being part of the banking system growing outside of the regulatory structure. Growing there as a way to escape from what was considered to be onerous regulation.
Which leads to the policy implication: we really don’t want to make the new regulations so onerous that what we encourage is the growth of a second unregulated shadow banking system. One which will, in hte fullness of time, most likely fall over again.
It’s a tricky balance but there isn’t, in anything close to a free society, any method of doing anything else. Ban this and ban that and people will simply construct a stucture even further out there: and yes, as and when this falls over it will be necessary to bail it out again. Simply to stop the whole system crashing.
Too much regulation will lead to exactly the problem that everyone wants to avoid: as will too little of course.