The writer is executive chairman of Santander
As the new year begins, and we try to rebuild our economies, we need to rethink the way we regulate finance. That is because the challenges posed by the Covid-19 pandemic are different from those caused by the 2008 financial crisis.
Back then, authorities drew two conclusions from the fact that banks were a big part of the problem. To reduce the risk to financial stability, banks needed to be much better capitalised, and to reduce economies’ dependence on large banks, competition from new entrants — including tech companies — should be encouraged.
These objectives have largely been met. Today, banks are indeed much better capitalised and balance sheets are healthier. Big Tech and other new providers have been making large inroads into financial services. Now the regulatory regime needs another reset to address three critical challenges.
The first is clearly the recovery, which would be accelerated if banks lent more to business. That means they need to be able to deploy more of the capital they have built up. And if they want to build up more capital to deploy, they need to be able to attract investors.
At the moment, however, most banks cannot deploy their balance sheets to their full potential. This is largely due to the way investors see capital regulation — including the capital “buffers” that banks have been required to build up since the financial crisis. The aim was simple: banks would increase their capital and build cushions during good times that could be drawn down to absorb losses in bad times. During the coronavirus crisis, regulators have allowed banks to use these buffers. But investors worry about what will happen once the economy starts to recover and banks are required to rebuild their buffers. This will take time, as low interest rates and weak economies will depress banks’ profits. This concern puts pressure on bankers to increase capital now, rather than using it to fund the recovery.
Regulators, including Randy Quarles who chairs the global Financial Stability Board, are talking openly about this problem. They cannot address it soon enough. In the near-term, authorities should stabilise capital requirements; eliminate uncertainty about the Basel III regulatory framework adopted after the financial crisis; and simplify and calibrate the way banks can calculate loss-absorbing capital and liquidity.
A longer-term rethink should look at how best to use capital buffers and the optimal level of capital requirements — and re-examine the way banks calculate the risk weightings on their assets, with an eye to freeing up capital to back new lending.
The second challenge is to reset the financial regulatory regime so it supports and hastens the green transition. Global action is required to agree on a “green” taxonomy, and make sure all large, listed companies comply with the recommendations of the Task Force for Climate Related Financial Disclosures. Markets need new incentives to support the transition to a low-carbon economy: regulators should consider how to reduce the cost of capital for banks that finance green activities.
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The third challenge is the digital revolution. Regulation now favours tech companies that intermediate financial services over banks. This is especially true for the rules on data, which powers payments. Large tech companies are becoming lending platforms without having to comply with most banking regulation. Their role, although still relatively small overall, is growing. Last year, fintech and Big Tech credit reached $795bn globally, according to the Bank for International Settlements. The pandemic will only entrench the digital players.
We need to level the playing field — not to give banks an advantage, but to remove the advantage that tech companies have had for the last 10 years. Under EU regulations, financial firms must give tech companies access to customer-generated data if the customer agrees. This requirement should apply to data held by every sector, including tech companies. The playing field should not be tilted in favour of anyone. New proposals from the European Commission require urgent action.
I am not saying we need to tear up all the regulation that was put in place after 2008. But rules should evolve as the world, the competition and risks change. Let’s stop regulating through the rear mirror. Politicians, regulators and banks need to find a way to make our regulatory structure serve individual customers and businesses better while helping lenders deliver results to their shareholders and address these three challenges. A reset is required.
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