Should the left be angry that new banking regulations were watered down?

Last week, the Basel Committee, made up of central bank governors from the world’s leading nations, announced new recommendations on banking supervision. The rules have been christened Basel III and will be adopted by national regulators in due course. Apparently, bankers are delighted about the rules, which could have been much tougher. They will also be phased in over several years, allowing the banks more breathing space than they were expecting. Stockmarkets around the world surged as a result.

Essentially, banks will be compelled to hold more capital to cover investment risks. More of their reserves will also have to be held in liquid assets such as gilts. In combination, the rules will make the global financial system more resilient, and it is less likely banks will require another bailout by taxpayers in the future.

But regulators could have gone further in the restrictions placed on bank manoeuvres, and by bringing in the rules sooner. The question is: should the left be angry that the banks have not been hit as hard as they could have been? The banks have caused a fiscal crisis in the UK more serious than any other in living memory. Surely the left should be campaigning for regulators to go much further in creating conditions for stability in the financial sector, so that our jobs and public services are never again placed at the mercy of the City.

Unfortunately, it isn’t that simple. As a result of Basel III – even in its diluted form – the cost of banking will inevitably rise. Mortgages and loans will be more expensive, and savings products will be less generous. Generally speaking, banks will be less profitable. Shareholders’ dividends may not be quite as high and employees’ bonuses may be slightly more politically correct – but ordinary people will suffer too. This is the price of relative stability.

The problem for the left is that the Labour government’s vision for welfare was little more than an updated version of Margaret Thatcher’s property-owning democracy. New Labour’s approach to asset-based welfare, as interrogated by Matthew Watson, was built on allusions about the housing market boom, and the notion that we could all make a fortune from investing in the stockmarket one way or another. The birth of ISAs, for instance, was consistently championed by New Labour as the hallmark of progressive financial inclusion. As such welfare for the left became fundamentally wrapped up in the fortunes of the financial sector. If banking becomes more expensive, this agenda is severely undermined.

This is not to say that the left should bemoan the end of asset-based welfare. But what is the alternative? These questions have not been discussed at all during the Labour leadership election – candidates have generally supported tougher restrictions on banks, without considering what this actually means for financial inclusion.

It also worth mention the opinion of Allister Heath (editor of City AM) on Basel III. He argues, among other things, that the new rules remain tied to the ‘fantasy land of mainstream finance theory’ in at least one regard. In seeking to ensure bank assets are more liquid, Basel III encourages investment in gilts (i.e. government securities). The assumption that all government debt will retain value and saleability in the event of another crisis may be profoundly flawed. Basel III is therefore not a panacea for financial stability.

There is perhaps one aspect of Basel III that the left can rally against without reservation: the complete absence of democracy in the Committee’s proceedings. The Basel Committee is in fact an informal, advisory body with no legal status. Civil society actors have had no formal role in its discussions. Furthermore, even at the national level, there has been no public debate on the rules and their implications. Not to mention that the governor of the Bank of England is almost entirely shielded from public scrutiny, despite now enjoying immense influence over UK economic policy.

Craig Berry is a former policy advisor at the Treasury


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