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How far should a regulator go to foster the competitiveness of its home economy? That is the question that the Bank of England has been wrestling with since the UK government gave it a secondary mandate to promote competitiveness and growth.
Last week, the BoE quietly released a paper on its latest thinking on a mandate that has drawn much criticism for its potential to unleash a flood of risky deregulation in the spirit of post-Brexit greatness.
The complaint has been that there is inherent conflict in giving regulators any kind of mandate to court the industry they are charged to police. Therein often lies chaos, as the UK’s nearest neighbour Ireland learnt in the run-up to its ruinous financial crisis. Those troubles prompted the country to strip the financial regulator of any role in promoting the financial sector.
The BoE’s staff paper, to be discussed at a conference on Tuesday, suggests, though, that the reality will be very different from the “free for all” fears, at least if policymakers are guided by the research of their experts.
The BoE team begins by musing on a different conflict, that between promoting both competitiveness and growth. Making the UK’s financial sector competitive could make it more risky, the staffers posit, if regulators were to water down the rules too much. In turn, this would jeopardise “medium to long-term growth”, since there is ample research into the economic damage caused by risky financial institutions blowing up.
The staffers square this circle by declaring that they interpret the secondary mandate as promoting competitiveness “providing that such actions would be consistent with not harming the growth of the UK”.
So the competitiveness mandate, where financial institutions could theoretically make the biggest gains, effectively becomes a tertiary one, coming after both the bank’s primary mandates and its secondary mandate on defending and promoting economic growth.
Furthermore, BoE bosses have long declared that the route to improving the position of the UK’s financial centre and all that dwell within it is through high standards. Now their staffers are making the same point, but with more supporting facts to back it up.
They say that the available literature and the BoE’s empirical evidence show that higher capital ratios “improve financial stability and help sustain bank lending, ultimately exerting a positive influence on the expansion of economic activity over the medium to long term”. The paper shows countries with higher actual capital ratios in 2016 delivered higher annual gross domestic product growth from 2016 to 2021.
The staffers don’t explicitly suggest going down the path of the US, for example, which is ratcheting up capital requirements for its banks through a particularly stringent application of the latest global bank rules. But their thinking is clear — growth means more capital, not less.
So said no bank executive ever, at least not about their own institution. Jamie Dimon, the veteran chief executive of America’s biggest bank JPMorgan Chase, last week slammed US regulators for hiking capital requirements as a leading lobbying group launched an advertising campaign complete with its own website calling on regulators to “stop”.
Still, the BoE paper does its best to convey industry support for its approach by pointing to a survey carried out this year among a group of 145 supervised firms, academics, advisers and other stakeholders. It says this provides “clear evidence” that the group cares “about the reputation of the prudential regulator to preside over a stable and predictable prudential regulatory framework that can withstand episodes of financial stress”.
The survey findings also hint at some other areas where the BoE could put its new mandate to work. Stakeholders want operational efficiency, they want simpler rules and they value “responsiveness to new developments to support industry innovation efforts”.
Work around those areas, along with an obligation to report to parliament on how it’s doing, will help the BoE to claim that the new secondary mandate is making the “big difference” officials promised earlier this year.
But the reality is, improving operational efficiency, simplifying rules and trying to support innovation were all priorities for the BoE’s regulatory arm and the Financial Conduct Authority long before the government came up with a competitiveness and growth mandate. All the mandate will do is hold regulators’ feet to the fire a little more on their delivery.