The author is govt chairman of Santander
As the brand new 12 months begins, and we attempt to rebuild our economies, we have to rethink the best way we regulate finance. That’s as a result of the challenges posed by the Covid-19 pandemic are totally different from these attributable to the 2008 monetary disaster.
Again then, authorities drew two conclusions from the truth that banks had been a giant a part of the issue. To scale back the chance to monetary stability, banks wanted to be significantly better capitalised, and to cut back economies’ dependence on massive banks, competitors from new entrants — together with tech corporations — needs to be inspired.
These goals have largely been met. As we speak, banks are certainly significantly better capitalised and stability sheets are more healthy. Large Tech and different new suppliers have been making massive inroads into monetary companies. Now the regulatory regime wants one other reset to handle three vital challenges.
The primary is clearly the restoration, which might be accelerated if banks lent extra to enterprise. Meaning they want to have the ability to deploy extra of the capital they’ve constructed up. And in the event that they wish to construct up extra capital to deploy, they want to have the ability to appeal to buyers.
In the intervening time, nonetheless, most banks can not deploy their stability sheets to their full potential. That is largely because of the method buyers see capital regulation — together with the capital “buffers” that banks have been required to construct up for the reason that monetary disaster. The goal was easy: banks would enhance their capital and construct cushions throughout good instances that might be drawn down to soak up losses in dangerous instances. Throughout the coronavirus disaster, regulators have allowed banks to use these buffers. However buyers fear about what is going to occur as soon as the economic system begins to get better and banks are required to rebuild their buffers. This can take time, as low rates of interest and weak economies will depress banks’ income. This concern places strain on bankers to extend capital now, reasonably than utilizing it to fund the restoration.
Regulators, together with Randy Quarles who chairs the worldwide Monetary Stability Board, are talking openly about this problem. They can’t tackle it quickly sufficient. Within the near-term, authorities ought to stabilise capital necessities; remove uncertainty concerning the Basel III regulatory framework adopted after the monetary disaster; and simplify and calibrate the best way banks can calculate loss-absorbing capital and liquidity.
An extended-term rethink ought to have a look at how greatest to make use of capital buffers and the optimum degree of capital necessities — and re-examine the best way banks calculate the chance weightings on their belongings, with an eye fixed to releasing up capital to again new lending.
The second problem is to reset the monetary regulatory regime so it helps and hastens the inexperienced transition. International motion is required to agree on a “inexperienced” taxonomy, and ensure all massive, listed corporations adjust to the suggestions of the Task Force for Climate Related Financial Disclosures. Markets want new incentives to help the transition to a low-carbon economic system: regulators ought to contemplate find out how to scale back the price of capital for banks that finance inexperienced actions.
The third problem is the digital revolution. Regulation now favours tech corporations that intermediate monetary companies over banks. That is very true for the foundations on information, which powers funds. Massive tech corporations have gotten lending platforms with out having to adjust to most banking regulation. Their function, though nonetheless comparatively small general, is rising. Final 12 months, fintech and Large Tech credit score reached $795bn globally, in keeping with the Financial institution for Worldwide Settlements. The pandemic will solely entrench the digital gamers.
We have to degree the taking part in discipline — to not give banks a bonus, however to take away the benefit that tech corporations have had for the final 10 years. Beneath EU laws, monetary corporations must give tech companies access to customer-generated information if the client agrees. This requirement ought to apply to information held by each sector, together with tech corporations. The taking part in discipline shouldn’t be tilted in favour of anybody. New proposals from the European Commission require pressing motion.
I’m not saying we have to tear up all of the regulation that was put in place after 2008. However guidelines ought to evolve because the world, the competitors and dangers change. Let’s cease regulating by the rear mirror. Politicians, regulators and banks have to discover a strategy to make our regulatory construction serve particular person clients and companies higher whereas serving to lenders ship outcomes to their shareholders and tackle these three challenges. A reset is required.