Angela Knight: Reforms risk crippling Britain’s financial system

The banking industry supports reforms made so far as well as many of the initiatives coming from the FSA, the EU and international standard setters. Structural changes to regulation and systemic risk have already been agreed at a high level across Europe. Specific proposals about how businesses and banks operate are in train.

What I was hoping for from the Government’s proposals were measures to address three key issues: capital requirements; the socio-economic consequences of any reforms; and how to coordinate international action.

UK banks are already holding more capital than before the crisis and twice what is required by the international Basel standards. That is considerably more than banks in competitor financial centres. We need to ensure UK banks are not at a disadvantage in comparison to those in other countries.

Further revisions to existing capital rules are also in hand. This clearly has an impact on the banking industry’s capacity to support the broader economy. The danger is that over-layering multiple capital measures could stop banks supporting households and firms through continuing to lend. A balance has to be struck between sensible insurance against the risk of bank collapse and the need to help individuals and businesses weather the recession. The more capital and liquidity banks hold, the less they can lend. This could set back our recovery from the recession. However, insufficient attention has been paid to understanding either the impact of these measures or the way they interrelate.

Financial services transcend national barriers so rules need to be international with moves in the UK dovetailing with those overseas ensuring the UK sector remains competitive, otherwise business could move away. We also need to ensure other major financial centres apply changes in a similar way and on a similar timescale.

Let me be blunt. There is no disagreement over an emphasis on financial stability. And the industry is willing to change ? indeed has already done so. But there must be an understanding of the impact on customers and the wider economy. The UK is a large international financial centre so, as we make changes, they need to be done with other countries on an equivalent basis and timetable ? one that does not impede our economic recovery.

Angela Knight is chief executive of the British Bankers’ Association

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