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Home > Blogs > Anthony Harrington > Financial regulation and compliance—The EU’s mill starts to grind

Financial regulation and compliance—The EU’s mill starts to grind

Finance Blogger: Anthony Harrington Anthony Harrington

The poet Longfellow once famously wrote: “The mills of God grind slowly, yet they grind exceedingly small.” The European Commission’s regulatory mill generally grinds at Longfellow’s God-like pace, but whether it grinds exceedingly fine or turns out to be grinding not very much of anything remains to be seen.

In the days immediately following the demise of Lehman Brothers, on September 14, 2008, the Western press was full of headlines about the need for much tougher regulation of the banking sector. The era of “light touch” regulation ushered in by President Ronald Reagan and Prime Minister Margaret Thatcher, was over, we were told. The banks that survived the crash would be brought to heel and held on a very tight regulatory leash. Such, at least, was the rhetoric.

Since then it has occurred to more than one commentator in the media that some leading banks, particularly in the US, seem to be cutting pretty much the same wake as they did pre the crash. Plus ça change, plus c’est la même chose. Of course, you will look long and hard for a market in silly derivatives backed by bottom-of-the-barrel subprime mortgages. Some lessons have been learned and it will be a year or two before even the slickest salesman can flog a suitcase full of that kind of paper to investors anywhere (one hopes).

However, there are lessons and then there are lessons. When Glass-Steagall was enacted in 1933, after the Great Crash of 1929, the lesson which the US Government drove home was the need to build impenetrable walls between deposit-taking banks and the so-called “casino” banks, the high rolling, stellar-profit-chasing investment banks. Otherwise, the latter would simply treat the former’s deposits as table stakes in the great game of financial chance. If we were going down that road today, which is to say, if we were acting on the lesson of Glass-Steagall, then the media would already be full of talk about the banking sector being turned into a low-return, utility-type sector—dull but dependable. That kind of talk is largely conspicuous by its absence, so we can take it that the great lesson of Glass-Steagall is not generating much resonance in the current debate.

Instead, what is being talked about is capital adequacy buffers, and the need for increased capital reserves. That this leads, as night follows day, to a contradiction of cosmic proportions, has so far not bothered politicians in the UK and the US. (The contradiction, if you’ll forgive me for spelling out the obvious, is that one cannot logically both tell bankers to lend more, and to save more when they’re kind of broke to start with—arithmetic doesn’t work that way). In the UK we are minded to get around that contradiction by saying, OK, we’ll make them increase their capital reserves, but not yet (so there’s a future time then where we can see that we don’t want banks to lend…?).

On September 23, 2009 the EU unveiled a package of proposed new laws for the banking and finance sectors. The EU envisages a European System of Financial Supervisors with a cross-border remit and with oversight over the ratings agencies (one of the villains of the crash). It also sees an EU-wide body to identify risks to the stability of the financial system as a whole.

A number of contributors to QFINANCE have thought long and hard about the potential shape of regulation to come. We suggest browsing the following short list:


Tags: banking , capital adequacy , EU , Glass-Steagall Act , regulation
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