EU public meeting over bank regulation – “overwhelmingly dominated by bank lobbyists”

Fixing finance: one step forwards, two steps back?

By New Economics Foundation – Tomorrow, officials at the European Union will gather to hear evidence on the impact of changes to the rules governing big banks made since the financial crisis of 2008.

This is part of a wider review set up to identify “unnecessary regulatory burdens” on financial services. As Finance Watch has pointed out, it’s somewhat peculiarly timed.

Much of the regulation drafted in response to the crisis isn’t even national law yet: so how can we assess its impact?

Why review this now?

The reason for this eagerness was made clear in a recent speech by Lord Hill, the European Commissioner for Financial Stability, Financial Services and Capital Markets Union:

“What makes this review urgent? The lack of growth across Europe. That’s one of the reasons why… we shouldn’t overregulate and interfere too much.”

This is puzzling given that the roots of Europe’s slow economic growth go back to the very same crisis these rules were responding to in the first place: the global financial crash.

When it comes to the supposed benefits of deregulation – which the UK is pushing hard as the price for our continued membership of the EU – you could scarcely pick a worse poster-child than the banking sector.

Regulations are good, not bad…

This is a symptom of an often heard but misguided view that regulation has somehow limited banks’ ability to lend which, in turn, has hurt the lagging European economy – that there’s a trade-off between financial regulation and economic performance.

In reality, the new rules have increased banks’ ability to lend to the economy, by increasing their capital. Other things being equal, a bank that has more capital is able to lend more – not less.

Promoting financial stability is not bad for economic progress but rather a pre-requisite for long term sustainable development in the wider economy.

…so they won’t be slashed, right?

With the programme of speakers giving evidence at tomorrow’s public hearing overwhelmingly dominated by bank lobbyists, this case is unlikely to be heard.

Instead, EU officials will be told that financial regulation has impeded Europe’s economic recovery and should be watered down. This has nothing to do with concerns over economic performance and everything to do with boosting bank profits.

What’s the real issue?

Europe’s economic woes have multiple causes, the most significant of which is a lack of aggregate demand. Any shortcomings of the financial sector have less to do with new regulation and more with the lack of meaningful structural reform of the banks.

Large, profit-maximising universal banks choose to allocate their capital to the most profitable activities, and lending to business – often involving high transaction costs for relatively small loans – is less profitable than other activities such as mortgage lending and lending to other financial corporations.

This goes some way to explaining why such a small proportion of bank lending supports productive investment in the real economy.

As long as responsibility for the creation and allocation of credit is left to a small number of large, profit-maximising universal banks, rolling back prudential regulation will do little to boost the real economy. It will, however, lead to a less stable financial system, leaving banks at a greater risk of failing and taxpayers on the hook.

Business as usual

These worrying signs come as part of a wider trend of a return to business as usual in Europe and the UK, as illustrated by a string of recent concessions to big banks in areas of tax and regulation.

Recent moves by the EU to revive securitization – the toxic practice of pooling and repackaging loans into tradable securities which played a key role in the financial crisis – is a further cause for concern.

The UK still has one of the biggest, most concentrated, risky, complex, and interconnected banking systems in the developed world. Much remains to be done to make the financial system as a whole more robust and stable. It is therefore deeply concerning that the policy environment seems to be moving in precisely the opposite direction in both the UK and Europe.

It’s ironic and disturbing that banks are managing to use the ongoing fall-out from the crisis they created to argue that the rules put in place to protect us should be stripped back.

With the global economy facing a slowdown and economists warning that another crash could be just around the corner, it is more urgent than ever that we don’t let regulation get remoulded around the demands of bank lobbyists as memories of the crisis fade.

 

NEF – Economics as if people and the planet mattered

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