The last week has seen a flurry of activity
around the world on the regulatory front but I have a suspicion that the only
people who will be really satisfied are the very people at whom the reforms are aimed - the institutions that caused the financial
storms of the last year or so. As far as I see it, the United States and Europe have
such fundamentally different approaches to this that it is hard to see any
global regulatory consensus emerging, let alone concerted action to put in place
a regulatory system that would prevent the near collapse of the western
financial system again. We have to remember that we are only looking at a
slightly calmer scene now because of the billions of public money poured into
propping up the system and its institutions. As Sir Martin Sorrell observed on
Radio 4 last Friday, the amount of public debt racked up dealing with this is
equivalent to the cost of a major war and it should be inconceivable that
no-one is held account for causing that war.
Let's start in the UK.
At the annual Mansion House Dinner in the
City of London last week, we saw the government and the Bank of England at
loggerheads over the path regulatory reform should take. One was pleading for
very limited action, saying that we should just look to the boards of the banks
and other financial institutions to take a longer term, more responsible view.
The other argued for some tough action to ensure that we didn't create monsters
that were "too big to fail", suggesting that there could be a Glass-Steagal
like split of investment and retail banking. You might have thought the
Governor of the Bank of England was the one arguing for just having a quiet word
in the ears of the City grandees. You would be wrong. It was a Labour
Chancellor of the Exchequer, talking in the wake of the worst financial and
economic crisis in over 60 Years.
New Labour has always been in thrall to the
City. It is one of the reasons why the credit bubble was allowed to grow so
huge before bursting and why so many high risk products were allowed to corrode institutional balance sheets. Labour trusted the City, probably because it doesn't
really understand it, and its whole approach to regulation has been to allow
the City to get on with making money, naively it thought for the country. I have seen no
clearer indication that this is a government that has run out of ideas, incapable
of changing course even when its previous course took the country onto the
rocks, than its failure to grasp the need for a radical overhaul of financial
regulation and the failed tripartite system.
The day after this stunning public
divergence between the government and the central bank in the UK, the Obama
administration in the United States came out with its proposed reforms. I don't
want to be too dismissive of such a complex plan but it is a mess. There seems
to be a regulator for everything, a whole new tier of federal regulation to
overlay the already cumbersome regulatory system that some parts of the
financial sector, such as the insurance industry, have to contend with at state
level. In some ways it is reminiscent of the UK's first stab at comprehensive
regulation of the financial services sector with the 1988 Financial Services Act
which spawned a real alphabet soup of narrow sector regulators. There is a
certain sense of déjà vu in reading US commentators attacking the Obama plan on
the same grounds. It will leave gaps and create opportunities for regulatory
arbitragemand these will be exploited by those who don't want to be properly
supervised.
In Europe, meanwhile, there seems to be a
greater sense of purpose, even if couldn't look more different to the US
approach if it tried.
The European Union wants to move to fewer,
supranational regulators and has an ambitious plan for getting there. Despite
UK doubts - opposition would probably be a more accurate description of the
government's stance - this plan is edging ahead and was largely approved at
the summit of EU leaders at the end of last week.
So far, despite fierce attacks on
"Anglo-Saxon" attitudes to regulation and the contribution these have made to
the crisis, EU leaders have been keen to keep the dissenting UK government on
board and have made compromises around the chairmanship of the proposed new
regulators to achieve this. To understand why they have done this you have to
look at the wider political scene in Europe.
The EU needs to get the Lisbon Treaty
ratified, a process that will probably take until the end of this year. The
Labour government backs the treaty and has never been prepared to contemplate
bowing to demands for it to be put to a referendum in the UK. The Tories oppose
the treaty and have said that if it is not ratified if (or as they see it,
when) they become the government, they will stop the ratification process,
possibly putting the treaty to a referendum. This is a doomsday scenario as far
as the rest of the EU is concerned so they are prepared to go quite a long way
to making Gordon Brown's life as easy as possible to ensure he survives until the treaty is finally nailed down. While it is very hard to
imagine a British government falling over a dust up in Europe on financial
regulation, such is the febrile nature of British politics at the moment EU leaders are not prepared to contribute to the Prime Minister's discomfort
and risk him being forced into an autumn General Election.
So, where does that leave the much vaunted
desire of world leaders (as expressed at April's G20 Summit) to make sure we never have to go through the same
crisis again? Frankly, it is desperately hard to tell but I still think that
the most coherent and focused case for reform has been that made by the EU. The
challenge they will face is translating that into a global plan.
Meanwhile, those most in need of a firm
regulatory grip being placed on their collar will look at this huge divergence
of approaches with a smug satisfaction.
