Morning:
8°c
It is an unarguable fact that you could stop all accidents on the M25 by imposing a 0mph speed limit. With traffic at a complete standstill no one would ever get hurt. But of course no one would ever get anywhere either.
So we have a trade-off between risk and reward - the regulation restricting us to 70mph does not stop all accidents, but it caps out the danger and allows people to use the road as it was intended. It is an acceptable compromise.
Banking may be harder to understand than driving but the costs and benefits of regulating it require the same kind of trade-off. The banks are as reviled as the worst drunk driver so anything which seems to bash them will be popular, and most of the criticism is likely to be that the measures do not go far enough.
One wonders, though, how acceptable new rules will be when people realise how the cost will come through in less money for mortgages, permanently higher charges on credit cards, or an end to free banking on current accounts.
The Treasury in its White Paper today on how to regulate the financial system could of course put any future banking crisis beyond doubt by so loading up the banking system with regulations and responsibilities that it could barely move. There would be no accidents. But the price would be unacceptable.
Like them or loathe them, the core job of banks is to collect and re-lend money and if they don't do it, or don't do enough of it, we all suffer because credit is the fuel of the modern economy. So in framing its proposals the Treasury has to be mindful of the wider issues. It does not want more crises but neither in seeking to prevent them does it want to put the economy in a straightjacket
That perhaps explains the tentative nature of the document, the mix of a few firm ideas and a lot of key issues shelved for further discussion.
On the firm side for example, the White Paper basically demands more capital be set aside as security and the banks have a greater eye to the liquidity of their investments and loans. That is sensible because to continue the motoring analogy, capital and liquidity are the shock absorbers in the system, and the stronger they are the more likely the system is to be able to cope with the potholes in the road.
But there are no answers today on some of the big issues which have resulted in bankers' local problems infecting the global economic system - should mainstream banking and casino banking be separated; how does one create local accountability in a global organisation; should bonuses be banned and should there be limits on the size of banks so that none is too big to fail.
Silence on these issues means this is very much a work in progress. The Treasury has decided it is time to ask the audience or phone a friend, not give the final answer. It is dynamic inactivity executed with a skill which would have made Sir Humphrey proud.
Even here, however, there are problems. Banking is an international business, even in these troubled times. If British rules make British banking too costly, they will lose business. People will get their mortgages and companies will get their loans from overseas, or from new non-banking institutions which will spring up. That will disable the British financial system while doing nothing to solve the world's problems.
Second it is an accepted fact that most financial innovation takes place to get round some rule or other. So even if we were to develop the most perfect regulatory system - which is not going to happen - it would be bypassed. The trick will be some time in the future to be able to spot the warning signs and then have the will to heed them. The best regulatory system in the world will be powerless if no one listens because we are all enjoying the next party.
