The banking crisis should not be an excuse to postpone deregulation in the City

·5 min read
Brussels City of London
Brussels City of London

The Silicon Valley Bank has been closed down. Credit Suisse has been hustled into a hastily arranged merger with UBS. And this weekend, the once mighty Deutsche Bank looks like it could be the next financial institution to run into trouble.

Against that backdrop, it is no great surprise that we are hearing a familiar clamour for more regulation, more oversight and tougher measures to clamp down on traders and speculators. There could hardly be a worse moment for the British Government to be driving through a round of deregulation for the City.

The timing is not, to put it mildly, exactly ideal. Yet the worst thing the UK could do right now is to back down on reforms designed to free up its finance industry. The crisis, after all, is in banking, not in the sectors such as insurance and share trading that are being deregulated.

The City needs to re-invent itself to make up for the losses from leaving the European Union. And the downfall of hubs such as Zurich opens up space for London. There is a case for changing the way banks operate. But this would be the worst possible moment to scale back the reforms of the City.

When the Chancellor Jeremy Hunt launched the so-called Edinburgh reforms in December, the outlook was very different. Inflation was an issue, and the equity markets had fallen sharply, but the financial system looked robust, and a rerun of the crisis of 2008 and 2009 was the last thing on anyone’s mind. The Chancellor took the moment to scrap many of the EU’s rules on finance, arguing that the UK could create a system that was a lot more flexible, and allowed a lot more scope for innovation. Fast-forward four months, and that is not looking quite such a good idea.

With banks in crisis across the world, and with the Government forced to step in to protect deposits, the mood has changed dramatically. There are already calls for the package to be scaled back, watered down, or even scrapped completely. Buccaneering, risk-taking bankers are crashing the global economy all over again, and we will need more controls, and tougher rules, not fewer.

At the rate things are going, we will soon be building more jails just to lock them all up. Of course, we can all understand where that is coming from. The crisis has reminded us just how much trouble a bad bank can cause. And yet, this is the moment for the UK to be bold, and to press ahead with freeing up the City. Here’s why.

First, it is banking where the crisis has started. The Edinburgh package included some reforms of that sector, such as review of the ring-fencing rules that split out mainstream deposit holding with riskier trading. But the bulk of the planned changes don’t actually have anything to do with banking, defined as holding deposits and lending money out to borrowers, at all.

The main planned reforms are in areas such as insurance, asset management and share listings, removing some of the ridiculously complex rules that bureaucrats in Brussels have imposed on the UK over the last thirty years. The collapse of Credit Sussie doesn’t make any difference to where insurers should invest their money one way or the other, and neither does it make any difference to the paperwork that has to be filled in before listing a company. There is no reason why we shouldn’t press on with making that simpler.

Next, the City needs to innovate. For 30 years, London prospered as the main financial sector for the EU and the eurozone. The efforts of Paris and Frankfurt to steal that away may have fallen a bit flat, but there is no point in pretending it has not had any impact, or that over time much of that business won’t drift across to the other side of the channel.

If it is to survive, and certainly if it is to keep growing, the City will need to create new products, develop new markets, and find new ways of doing business. It will only be able to do that if it has the freedom to try out new things, and if it is not tied down with lots of rules and regulations that don’t even achieve very much, and which kill off new ideas before anyone has even tried them. If we don’t deregulate, none of that is going to happen.

Finally, the demise of Credit Suisse, and the burning of its bondholders, mean that Zurich is effectively dead as a financial hub. Neither shareholders or bondholders appear to have any rights any more in Switzerland, and it is hard to see why anyone would want to place any money there.

The result? There is a big space for its main rival, London, to move into. Zurich, after all, was the sixth most important finance centre in the world, ahead of Paris and Tokyo. It is a big prize. To make that happen, however, the UK needs to keep reforming its finance rules, and not slavishly follow a model designed for the EU.

True, there may be specific rule changes that are needed in banking. The case for the Bank of England to provide secure deposit accounts where anyone can simply park their cash without worrying about who it was being lent to, or whether they would ever get it back, has started to become overwhelming.

But we should not use a crisis primarily started by central banks keeping interest rates too low for too long as a cover for scrapping the reforms of our financial system, or for burying insurers, asset managers and stock markets under fresh mountains of red tape.

The City is one of our most important industries and it needs to be allowed to adapt - and we will all end up poorer if that doesn’t happen.