There is no such thing as a free lunch. Everything has a cost; all decisions have consequences. It is a shame that the hordes of braying banker-bashers don’t seem to grasp that basic truth. It goes without saying that the industry needed to change dramatically after the crisis of 2008. But that obviously doesn’t mean that all change is always right, or that the authorities have pushed through the right kinds of reforms.
Among the good changes have been requirements to hold much greater amounts of capital; a drastic reduction in off-balance sheet structures; a much harsher application of the rule of law and a belated prosecution of wrongdoing; and the looming introduction of resolution mechanisms, which will banish too big to fail and reintroduce the discipline of profit and loss. But there have been lots of bad changes too, including wage controls; endless levies and taxes; extreme regulatory uncertainty; almost random fines; and a race to introduce every kind of possible banking regulation known to humanity, usually in an incoherent and contradictory manner.
The latest wrong-headed proposal will be announced by the Bank of England on Friday: it is set to impose a much stricter leverage ratio on the industry than recommended by the Basel Committee, the international rule-setter. For a start, there ought to be no need for such a ratio at all – the much stricter rules on capital and liquidity that have already come into force, combined with the elimination of moral hazard triggered by the new resolution mechanisms, ought to be enough to reduce risk in the industry to a more rational level.
The bottom line is that banks will need to put far more reserves aside. In the UK, that will mean that mortgage lenders, including building societies, will be hit especially badly, as their activities are currently deemed relatively safe and thus don’t require too much capital; so every pound they lend out will cost them more. This extra cost will be passed on to consumers in the shape of higher interest rates on mortgages and a reduced supply of credit. This is bound to happen; there isn’t really any debate about it.
It is fine to want to make the banking system safer. It’s also right to make sure that the price of credit becomes rationally priced, with all the correct risk premia [sic] priced in. But you can also have too much of a good thing. It is a shame that the authorities, which feel compelled to be ever-tougher on the banking industry for political reasons, cannot see the consequences of their action.
Full article: Authorities are about to crack down on banks again – but it’s you who will feel the pain (The Telegraph)