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Academics criticise bank regulations

The UK’s leading academics, associated with the Institute of Economic Affairs, have called for a ‘U-turn’ in financial regulations, arguing for”‘simpler and more stable legal frameworks”. Experts said that the current regulations are ‘too complex, as well as being dangerous and unnecessary.’

Alan Morrison, Professor of Finance at Saïd Business School and one of the authors of the article, explained in an email to Cherwell: “Capital regulation is staggeringly complex. Its principles are laid out in a series of accords published by the Basel Committee.

“Their first capital accord was communicated in a 26 page document; the later Basel II document ran to 347 pages, and subsequent documentation has added a further 166 pages.

[That’s 539 pages] that are hard to understand, and [have possibly become] a focus for lobbying and regulatory arbitrage.”

The article further argues that increased regulation is not the key to a sustainable financial market. One alternative solution proposed by Morrison is increasing the level of equity held by banks.

He said, “Banker arguments that this would undermine industry are unconvincing to me, and smack of special pleading,’ he said in his email, emphasizing that the key is to make the requirements ‘easy to understand and hard to work around.’’

Additionally, Morrison argues that the tax break on borrowing that corporations receive should be abolished to make debt less attractive, and finally, he suggests, in line with the proposal conveyed in the Vickers Report, that separation of commercial and other forms of banking would be a step towards improvement.

“Interestingly, one of the proposals involved abolishing the deposit insurance, which is an often failing system developed to protect bank customers. This safety net inadequate because it encourages bankers to take more risks than socially desirable, but fixing this does not necessarily mean that people who keep their money at the bank would have to live with the threat of losing everything.’

“I think, although some of the other people signing the article to which you refer may disagree, that such an outcome would probably undermine the banking sector and that it would be arguably uncivilised and cruel. High and simple capital requirements would be one way to address that problem; another would be heightened liability for bank shareholders.”

Details of the argument can be found in IEA’s journal of Economic Affairs: “Financial regulation: the need for a revolution.”

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