(Polity, £7.99)
This short, lucid book tells two stories—one familiar, the other less so. Many people will have a sense of the events leading up to the credit crunch of 2007-8 and of the financial catastrophe that ensued. Howard Davies, the former Chairman of the Financial Services Authority, sets out with great clarity how it all happened.
But it is the book’s second movement that stands out. Here, Davies, in the most measured language, tears into the regulatory response to the banking crisis. Low interest rates sent investors on a search for decent returns, which ended with large-scale investments in ever more complex products. And as the banking and financial system became more complex, says Davies, regulation became more abstruse, as if to match it.
But this, he says, was a grievous mistake. You do not fight complexity with complexity. It is counterproductive. The financial services industry thrives on complex regulation, which creates all sorts of unintended opportunities for profit, and makes it much harder for new companies to challenge large, established firms. Regulation is now such a morass that big banks have entire departments dedicated to compliance. Start-ups cannot even begin to match this.
This tendency towards regulatory complexity remains, says Davies. His analysis of the current set of international regulatory and standard-setting bodies is withering. Britain is not let off. Davies thinks the new system of regulation within the Bank of England is entirely wrongheaded and overly complex.
Little has changed, it seems, since 2008: the essential weakness of the financial services sector remains. Davies’s question of whether it will take another crisis of an even greater magnitude before we do anything about it is deeply unsettling.
This short, lucid book tells two stories—one familiar, the other less so. Many people will have a sense of the events leading up to the credit crunch of 2007-8 and of the financial catastrophe that ensued. Howard Davies, the former Chairman of the Financial Services Authority, sets out with great clarity how it all happened.
But it is the book’s second movement that stands out. Here, Davies, in the most measured language, tears into the regulatory response to the banking crisis. Low interest rates sent investors on a search for decent returns, which ended with large-scale investments in ever more complex products. And as the banking and financial system became more complex, says Davies, regulation became more abstruse, as if to match it.
But this, he says, was a grievous mistake. You do not fight complexity with complexity. It is counterproductive. The financial services industry thrives on complex regulation, which creates all sorts of unintended opportunities for profit, and makes it much harder for new companies to challenge large, established firms. Regulation is now such a morass that big banks have entire departments dedicated to compliance. Start-ups cannot even begin to match this.
This tendency towards regulatory complexity remains, says Davies. His analysis of the current set of international regulatory and standard-setting bodies is withering. Britain is not let off. Davies thinks the new system of regulation within the Bank of England is entirely wrongheaded and overly complex.
Little has changed, it seems, since 2008: the essential weakness of the financial services sector remains. Davies’s question of whether it will take another crisis of an even greater magnitude before we do anything about it is deeply unsettling.
