Up until the past few weeks, conventional wisdom has held that financial institutions gravitate to those areas where regulation is lightest and that any attempt to impose tighter controls risks a mass exodus of these firms to a city with a more laissez-faire environment. This has been the argument against increased regulation in financial centres like London and New York.
But as Peter Thal Larsen and Francesco Guerrera said in Saturday’s FT, the world of investment banking has now changed beyond recognition. Fings definitely ain’t wot they used t’be.
“The market has changed more in the past 10 days than it had in the previous 70 years,” says one senior executive at a European investment bank. The events have confirmed beyond doubt what bankers around the world have gradually come to recognise: investment banking’s long boom is over and several lean years lie ahead. Even when it recovers, the business is likely to be narrower in scope, subject to greater regulation, smaller than in its heyday and – above all – less profitable.
This bit got me thinking though:
[G]iven the comprehensive failure of most banks to measure or manage their risk, regulators are keen to cap banks’ ability to accumulate assets, regardless of their apparent solidity. Switzerland’s banking watchdog is considering imposing a leverage ratio – which limits the assets a bank can own as a proportion of its equity – on UBS and Credit Suisse. In the US, the Fed is likely to use its new-found authority to press Goldman and Morgan Stanley to shrink.
At first sight, this increased regulation looks unattractive to the banks and, sure enough, they are kicking up about it. But I wonder if, in time, it could become a selling point.
If confidence in the global banking system has collapsed and banks are finding it more difficult to borrow money, doesn’t the fact that a firm is operating under a tighter regulatory environment make it look more secure? Might not these measures give a bank a sort of kite-mark to reassure investors and creditors that it is a stable organisation and a safe bet?
If increased regulation becomes fashionable, financial centres with fewer rules might start to look unattractive. What, for the last twenty years has been thought of as buccaneering and innovative could seem a bit shady and precarious as a more cautious approach to banking becomes the norm. It might be that cities begin to sell themselves by reference to the protection their regulatory environment offers, rather than by boasting about their lack of rules and controls.
Only time will tell, of course, but I wonder whether, in the not-too-distant future, a laissez-fiare environment like the one that has prevailed in London for so long might look, y’ know, just sooooo 2007.