In addition to the tough new regime of personal accountability, the commission would supplement the Basel standards on bank capital with a tight leverage ratio.
The British government, preoccupied with finding ways to stimulate growth as the next election approaches, will no doubt think hard before making any changes that might drive business offshore. However, the government is caught between a rock and a hard place, hemmed in by a parliament that, strongly backed by a bank-hostile press and public opinion, is eager to enact reforms, and by EU directives to implement a tougher regime.
So, is the commission right that the UK government should move quickly on reform and disregard the consequences?
Such evidence as one can find from international surveys suggests that the regulatory changes implemented so far have not driven bankers away. London has already implemented an approach that is tougher than that of most other financial centers. Taxes levied on executive bonuses have cost international banks dearly. Regulators are now appreciably tougher and more intrusive than their counterparts in New York. Bankers do not like it, but they have not yet left for more congenial locations.
Nor do they indicate that they will. Indeed, the latest Z-Yen index of global financial centers showed London maintaining its first-place position — and with its margin over New York unchanged. The Asian centers are catching up, as one would expect, but they are hardly direct competitors for business that would otherwise be done in London. Frankfurt and Paris, the most plausible European competitors, languish in 10th and 26th place respectively.
Rating agencies and shareholders are nervous when they hear that a stricter regulatory environment is not necessarily a disadvantage. However, a regime in which personal responsibility strongly affects individuals in one jurisdiction will give bankers pause for thought, especially in the case of global banks with complex matrix-management systems that enable product heads to be moved elsewhere.
British legislators will need to be satisfied that any new regime captures the right people, in the right way. However politically appealing the idea of rogue bankers behind bars might be, putting them there is likely to remain very challenging in practice.
Howard Davies, former chairman of Britain’s Financial Services Authority, deputy governor of the Bank of England and director of the London School of Economics, is a professor at Sciences Po in Paris.
Copyright: Project Syndicate