Edinburgh reforms: is risk-taking in the City back?

Just months before “Brexit ejected him from the Treasury”, George Osborne “gave City bankers one final bashing for their sins”, said Simon Foy in The Daily Telegraph.

In March 2016, the then-chancellor introduced a new law allowing senior bankers to be jailed for up to seven years “if their risk-taking was deemed to be egregious enough”. The move terrified City executives; but now, after years of stagnation, priorities have changed.

Last week, Chancellor Jeremy Hunt watered down the “senior managers’ regime” – in one of “30 regulatory reforms” designed “to awaken the Square Mile” and bolster its position as an international financial centre. Dubbed the “Edinburgh Reforms” (because they were announced there), or Big Bang 2.0, the measures will also loosen the capital “ringfencing” rules for retail banks; mandate financial regulators to focus on economic growth and competitiveness; and allow pension funds to invest in a wider range of assets. “Risk-taking in the City is back with a bang.”

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Mixed reactions

The plan was applauded in the City. But elsewhere, the reaction was one of horror, said Kalyeena Makortoff in The Guardian. Sir John Vickers, the economist who led the inquiry into the UK banking industry after the 2007-08 crisis, said the Chancellor may be taking Britain down an “extremely dangerous path”.

Vickers is “particularly concerned” about plans to roll back ringfencing rules that protect savers by separating their deposits from riskier investment banking operations. Although targeted at smaller banks, they could also result in larger operators, such as NatWest and Lloyds, “facing fewer restrictions on how they fund their operations”, while enabling them “to sell more complex products to customers”.

‘Debatable’ proposals

Hunt is right, said Lex in the FT: “over-stringent banking regulation fosters the stability of a graveyard”. But while some proposals, such as loosening the EU-imposed Mifid II regulatory regime, are “undeniably welcome”, others are “debatable”.

Rather than abandoning “the principle of accountability” for senior managers, it would be better to enforce it narrowly but strictly. And anything other than “minor tweaks” to ringfencing would be a mistake – it might boost competition, but at the cost of requiring “future bailouts”.

The regulatory cycle follows “a well-worn pattern”, said Patrick Hosking in The Times. “A market crash, or consumer scandal leads to howls for something to be done and an abrupt tightening of the rules.” Then these safeguards get slowly chipped away – until the next crash. “Too much City ‘growth’ and innovation… is built on nothing more than complexity and leverage.” They’ve tried “unleashing the City’s potential before”. It didn’t end well.