Bank of England: Don’t wipe out international banking

Excessive red tape risks trashing international banking and impeding trade, harming the real economy for little gain, a top regulator at the Bank of England has warned.

Sarah Breeden, the acting executive director for international banking, said that regulators must look at the costs of their actions to rein in the banks and not just the benefits, resisting calls for ever-tougher rules on banks.

“We need in particular to ensure that that resilience and stability is not achieved at the expense of what might colloquially be described as the ‘stability of the graveyard’,” she told an audience at Harvard Law School.

“Put another way, we do not want to tame international banking to such an extent that it is unable in practice to support international trade and growth, or that it does so at too high a cost.”

The Bank of England has been one of the leading regulators pushing for banks to raise bigger financial buffers to protect themselves against a financial downturn, and the UK has also been keen to split up banks’ internal operations to separate investment banking from high street banking.

Ms Breeden compared the moves with “lion taming” as “international banks … have the potential to inflict great damage on others if not handled carefully”.

But she said that excessive regulation could cause more problems than it solves: “We do not want the lions to be completely sedated.”

So far the Bank of England has not treated British units of foreign banks harshly, she said, deciding not to run local stress tests to the banks or to demand they hold extra capital.

And instead of risking regulators falling out in a financial crisis, she said a careful system has been designed to give banks and regulators incentives to co-operate.

The idea is that in a recession or a bank crisis, the British authorities could choose to convert a foreign bank’s debt into equity in the UK, forcing the parent to take losses – unless the foreign parent bank takes responsibility for its actions in the UK by sending extra capital to Britain.