Whatever new measures are introduced, Professor Charles Goodhart, ex-Bank of England MPC member, says that banks will always win any contest with regulators.
"The banks have far more resources and hence can hire better skilled employees and will normally have more political clout. Bankers will therefore innovate around regulations and regulators will tend to lag behind."
Policymakers around the world have adopted measures in recent decades that have, unwittingly, increased the virulence of the financial cycle, according to Professor Charles Goodhart, former member of the Bank of England's MPC.
Speaking at the Economic and Social Research Council’s Economics Forum, he said future regulation will aim to smooth the extremes of the financial cycle but it will also have unintended side effects.
The debates in Europe and the US over measures to avoid a future repeat of the current financial crisis are distinct,” said Goodhart. “The Europeans favour enhanced regulation by introducing counter-cyclical capital charges that respond to cycles in leverage and in asset prices. The Americans tend to distrust further regulation and are currently looking at forcing banks to insure themselves against any future risk or insolvency.”
The effect of European regulators imposing counter-cyclical measures will be to raise the cost of capital against banks [1]which in turn increases the cost of bank intermediation. As a result, investors and borrowers are likely to seek alternative channels to the more costly bank intermediaries.
Links:
[1] http://www.financeweek.co.uk/topic/strategy-planning/how-can-fds-get-banks-batting-their-side