Banks have had a good two days, winning concessions on rules designed to split up the banks and put an end to misconduct.
On Thursday, the Treasury reversed planned rules to force >top bankers to prove they did everything they could to prevent bad conduct in the event of a scandal, pushing the burden of proof on to the regulator. The so-called senior managers regime comes into force next year, but will be a far less scary proposition for the bankers it applies to.
Shortly after, the Bank of England tweaked proposals on ringfencing — a plan to separate retail banking operations and investment banking activities at the biggest lenders. The changes make it easier for the two sides of the bank to share resources and capital.
The change means UK banks will only have to raise £3.3 billion ($US5 billion) in capital to meet the new rules, which is far less than thought and means the rules won’t bite as hard as the banks feared.
Banks have until 2019 to comply with the rules, which are a response to the 2008 financial crisis and aimed at ensuring deposits and other essential functions of banks are protected if the investment banking arm blows up.
The new rules are a product of a commission on banking rules led by John Vickers, an economist and Oxford don, in 2013.
The previous incarnation of the ringfencing rule was pretty unique, and went beyond anything suggested by the European Union or US. The same went for the proposals on senior managers, which were the strictest of their kind pretty much anywhere in the world.
This was part of the problem. International banks are well set up to take advantage of national differences in financial rules, something known as regulatory arbitrage.
The introduction of tough rules led to banks like HSBC threatening to move their headquarters overseas, and a concern among some policymakers that London would lose its finance-friendly image.
This ability to move asset portfolios and people around the world is a powerful lobbying tool for banks, because it gives them political power that the regulators just can’t match. Since being re-elected as Chancellor, George Osborne has overseen a general row back of the tougher banking rules partly for this reason.
Banks shunning London would weaken the amount of global finance he has power over, so he’d naturally be averse to it.
But it’s just possible the rulemakers might have been playing the long game all along. Banks are well known for their formidable lobbying power and if you know that bank rules will likely be softened in the future, it makes sense to make them really hard to start out.
The initial proposals were incredibly tough and not 100% practical.
For example, the senior managers regime, with its reversal of the burden of proof, would have gone against a lot of tenants of UK law and would likely easily be overturned by legal challenges.
But the headline-grabbing proposal focused the attention of banks’ lobbying efforts.
If the banks hadn’t needed focused on that one point, they could have won concessions elsewhere, even to the extent of stopping the proposal entirely.
As it stands the softened rules are still incredibly useful for regulators because they force senior bankers to check their business lines aren’t doing anything dodgy or risk being personally liable for it.