Boris Johnson’s government, on a mission to prove the benefits of Brexit, has now promised to introduce a Financial Services and Markets Bill within the next year which will revoke European financial rules and replace them with something that best suited to the UK.
Details are very scarce as to what this means for the City, but its statement of intent is troubling: the proposal is to force regulators to adopt a greater focus on growth and international competitiveness. In this direction are dangerous rocks.
Pursuing growth in banking or insurance is almost never a good idea – it usually comes with too much bad risk. Scrambling to establish the most competitive regulations isn’t always healthy either, as the 2008 financial crisis showed. Sure, banks and insurers boomed across the Western world, but many were the most affected by the business they did in London. US insurer AIG, for example, was hurt by credit derivatives underwritten by its UK financial products arm. For many German banks and other Europeans, the damage was caused by London-based operations that borrowed cheap dollars from short-term markets and invested them in US mortgage bonds.
But even after the crisis and Brexit, London is still in the top ranks of finance. It is Europe’s largest capital market, with a fifth of global activity, just behind a quarter in the United States, according to New Financial, a London-based think tank. It is the undisputed world leader in the derivatives and foreign exchange markets: more dollars are exchanged every day in Great Britain against other currencies than in the United States: 1.6 trillion dollars against 1.2 trillion of dollars.
The British government wants to get rid of the constraints of European law. And yet, even under these rules, Britain is the world’s largest exporter of financial services, according to The City UK, a lobby group, ahead of the United States. And only 30% of these exports go to the European Union, less than the 34% that go to the United States; the remaining 36% is distributed among the rest of the world.
Some pieces of EU law are unlikely to be relevant to the UK’s internal markets, but when it comes to rules important to international finance and European regulators, Britain won’t risk losing business in the UK. benefit of the continent only if it deviates too much from the existing rules. The EU wants to have some control over the risks taken by banks and investors that European governments might have to support. This makes sense and that is why the bloc wants to withdraw certain assets and activities within its borders.
But European citizens still have more savings in bank accounts than in investment funds or pensions; the bloc is far from creating a unified capital market to challenge London. Neither the EU nor the US are embarking on a wave of deregulation themselves and neither should the UK.
What does the city want? An end to the bonus cap imposed by the EU for obvious reasons, but it would make little difference to international competitiveness – if it did, an exodus of bankers from all over Europe to the US would be ongoing for a long time.
Bankers have already won a fight to get London to relax registration rules for blank check companies, or SPACs, which have exploded during the pandemic. It now looks like a waste of time as the United States – the country of the biggest excess of SPAC – tightens the rules and banks get rid of their customers.
Think tank New Financial produced a series of recommendations in an article this month, many of which are quite specialist, but include a reduction in bank capital requirements and calls for the removal of rules – created in the wake of the crisis of 2008 – which keep ordinary consumer deposits in quarantine. investment banks in institutions that do both.
UK capital rules are in line with other countries, and it is hard to see evidence that London is suffering for its depositor protection. According to the Bank for International Settlements, banks located in Britain consistently make more international loans than those in any other country.
Promoting digital innovation is, of course, on everyone’s bingo card: the UK is already Europe’s number one market for venture capital investments and fintech companies, according to analyst Nalin Patel senior at Pitchbook, a specialized research service. There could be a few tweaks to be made, but Britain’s flexible and cautious approach seems to be working well.
Britain’s main watchdog, the Prudential Regulatory Authority, has been hailed by international banks for its approach to things like cloud computing. This comes from the fact that it already has competition as a secondary objective after financial stability, security and solidity. Putting international competitiveness on an equal footing with financial stability would be a mistake that would damage London’s reputation in Washington, Brussels and beyond.
History shows that it was decisions made elsewhere that contributed as much to the City’s success as the manipulation of regulations here. The growth of London dollar lending in the second half of the last century began when caps on interest payable by US banks led to a buildup of deposits in the UK.
Astute financiers like Siegmund Warburg found ways to tap into this underemployed capital even before US tax changes energized the international bond market. London’s modern expertise, services and money flow were firmly established before these restrictions were lifted. Britain was then poised to capture international capital flows as world trade increased and economies gradually opened up.
Today, the greatest threat to the City comes from the geopolitical ruptures that threaten to undo the last decades of globalization. Looser financial rules won’t stand up to political battles or trade wars if that’s where the world is headed. The only thing a bonfire of regulations guarantees is to expose Britain and its taxpayers to greater financial risk.
More from Bloomberg Opinion:
• Wartime Brexit threats are doubly wrong: Lionel Laurent
• The UK is distracted from its real problems: Lara Williams
• Why I am bullish on Britain and betting on its future: Michael R. Bloomberg
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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