|Banking regulation must be simplified for the sake of both financial stability and society, Andy Haldane, the Bank of England’s executive director for financial stability, has said.
Regulations have grown “Byzantine in their complexity and Heath-Robinson in their design”, Mr Haldane said, as he called for the old banking rule book to be ripped up and replaced with a “simple” set of standards.
Simpler regulation would stamp out regulatory arbitrage, level the playing field between big and small banks, and remove the “deadweight costs borne by society” of burdensome supervision.
Speaking at the International Financial Law Review Dinner, he compared current regulations to “sub-optimal technologies such as QWERTY keyboards and VHS video-recorders” that are there by historical accident even though they “may not necessarily serve society well”.
Complex rules “advantage those best able to exploit the cracks”, Mr Haldane added. “This tends to be those with the deepest pockets who can afford the slickest tax accountant. Complexity, in other words, acts like a regressive tax.”
Simplicity has already been proved to work, he claimed. “Simple measures of bank leverage, untainted by such complexity, were ten times better at predicting banking failure during the crisis than complex regulatory alternatives.”
Radical reform is needed as “thin-slicing reform condemns us to failure”, he insisted. “Tax reform has been successful when it has recognised that fact and has started simple and afresh. Regulatory reform is no different.”
He was speaking shortly after separately arguing that bankers should be paid in forms of bank debt to discourage “strange incentives” and reduce risks to the financial system.
In comments at an event organised by the Federal Reserve Bank of Atlanta in Georgia, he claimed that rewarding bankers with shares can encourage them to take large risks when the company runs into trouble, but paying them in bonds may persuade them to take preventative action earlier.
“Equity can give strange incentives to management” when a firm is “at death’s door,” Mr Haldane said yesterday at an event arranged by the Federal Reserve Bank of Atlanta in Georgia. “In the crisis, many big firms gambled for their resurrection when, if you look at how top management was remunerated, it was heavily in equity.”
Using bail-in bonds and cocos, which can be wiped out if a bank is at risk of going bust, could incentivise management to have a “remedial plan before they are triggered,” Mr Haldane said.
“More can and should be done to have those sorts of debt form a larger part of compensation structures,” he added. Although he warned he “wouldn’t exaggerate” the incentive.