Investment Banking Regulation Creates Political Conflict in Britain

The investment banking industry has certainly seen its share of regulatory criticism and increased oversight since the market meltdown of 2008. Around the world, governments, regulators and central banks are looking at ways at reducing risk within their nations’ core banking operations. In many cases, this may mean splitting higher risk proprietary trading activities and investment banking from traditional deposit and lend type retail banking.

As one of the hardest hit nations during the credit crisis, the British government has been aggressive in seeking out ways of reducing systemic risk within their financial system. Politicians are seeking ways to protect their budgets from another run of bank bailouts, or at least give the voting public the appearance that the country is moving in the right direction. Even in Britain, as one of the leading financial hubs of the world, political pressure exists to separate riskier investment banking activities from retail banking. But the debate has been fierce. Even their central bank can’t come to a consensus on the need for a full banking split.

British Central Banker’s Unclear on Future Direction of Investment Banking Regulation

Paul Tucker, who is the current deputy governor of the Bank of England and was perceived as the frontrunner for the next governorship before the recent appointment of Mark Carney, expressed his concern over such proposals to the parliamentary commission on banking standards in November. Tucker’s concerns reflect the reality that dividing investment banking from retail operations actually makes the industry less transparent, potentially hiding systemic risks from the oversight banks currently face. “People fall into thinking: ‘If only we could make retail banking safe, the financial system will be safe,’ and frankly I think that is nonsense.”

While Tucker supports the implementation of the bank ring fencing legislation currently on the table, which is named after the head of the independent commission on banking Sir John Vicker, his views run contrary to the opinion of his boss who wants further reform explored. The current Bank of England Governor Mervyn King has suggested that further steps may be necessary to protect the financial system, perhaps even considering a full split of investment banking from retail operations. While this line of thinking has political appeal for the appearance of stricter regulation, there is inherent risk. Pushing a harder line of reform may create additional opposition, stretching the process out over a longer term. This would leave the financial system exposed in the meantime, without a guarantee that future regulations would be more stringent than the Vicker plan.

Future Uncertain with New Governor Appointed

The appointment of Mark Carney, the current Canadian central bank chief, as the next Bank of England head adds an uncertain element to the mix in future British regulatory policy decisions. Carney is known to favor strong regulations, which led Canadian banks through the financial crisis largely unscathed. On the other hand, Carney is also personally familiar with the investment banking industry, having worked for Goldman Sachs for several years in London and New York. His balanced approach is highly regarded around the world, but how he fits into the picture going forward in the U.K. is uncertain.

Outcome of Regulatory Decisions will Impact Investment Banking Opportunities

Overall, the British investment banking community opposes even the ring fencing measures, though there is certainly an understanding that some reform will almost certainly occur. There will be a real impact on investment banking jobs in London, and many jobs may disappear or move offshore. The balancing act between regulation and economic growth will be a tough road, and one to closely watch for implications across the world.

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