A year after moving from London to New York, Gillian Tett, US managing editor of the "Financial Times", contrasts the two financial centres’ responses to the global downturn – and prospects for the future.
Six years ago, the word “London” provoked unease in New York financial circles. Back in the days of the credit bubble, it seemed that financial business was drifting from Manhattan to the City of London, partly because the UK was employing a self-styled “light touch” regulatory regime.
Thus, the issue that worried some American politicians and financiers – and even prompted New York Mayor Michael Bloomberg and New York’s senior US Senator Charles Schumer to commission a study ("Sustaining New York’s and the US’ Global Financial Services Leadership") – was whether it was time for America to change its own approach to regulating banks, and make it equally “light touch” and less coercive.
How times change. These days, financiers and politicians on both sides of the Atlantic are eyeing each other warily again. But now there is an emphasis on imposing more, not fewer, controls.
In the aftermath of the financial crisis, the impetus among governments today is to show that they can make their financial systems more robust, rather than more profitable.
However, as governments clamp down in this post-crisis world, they are not doing so in ways that are completely different, either in terms of degree or emphasis. In some areas, there is certainly a similar approach. In the past two years, both American and European policy-makers have demanded that the banks increase their holdings of capital, partly via the new global Basel Accord. They have also called for derivatives to move onto a centrally cleared platform, to remove settlement risk and provide greater transparency.
And in both regimes there is a drive under way to discourage banks and hedge funds from taking outsize, dangerous proprietary bets, and do more to protect financial institutions’ customers. The net result is that financiers on both sides of the Atlantic complain that they are being suffocated by a veritable tsunami of complex new rules; emanating not just from Basel, but Washington, London and Brussels alike. And there are equally common complaints that this tsunami is driving business away from Western-regulated entities, either towards new geographical locations (say, Singapore or Switzerland), or to darker corners of Western finance itself (say, hedge funds or private equity groups).
But there are some subtle differences, too, both in cultural tone and regulatory detail. In the UK, there has been a lively debate about the need to end the “too big to fail” threat. More specifically, a high-profile advisory report by Sir John Vickers called for British banks to be ring-fenced, to separate the retail operations from the more risky wholesale activities. This has now been broadly endorsed by the British government, along with additional proposals to impose even higher levels of capital charges on banks.
In the UK, there has also been a heavy emphasis on the matter of bankers’ pay. Although the government has stopped short of trying to introduce direct controls, there has been a welter of political criticism, and banks have been subject to additional, punitive taxes – partly because of a widespread cultural hostility towards the idea of bankers receiving outsize paychecks.
In America, by contrast, remuneration has sparked far less action; for while the so-called “Occupy Wall Street” demonstrations have complained about bankers’ pay in a generic sense, there is far less political hostility towards the idea of high salaries. Similarly, American officials have hitherto not tried to make any effort to break up their banks.
Instead, the American regulators have focused heavily on trying to curb risky proprietary trades by regulated entities, via the introduction of the so-called “Volcker rule”. And, more widely, there has been a far more vocal attack on the whole derivatives world, with myriad new rules trying to introduce controls; the US Commodity Futures Trading Commission (CFTC), to name but one example, is now trying to introduce position limits in the commodities market, using a level of micro-controls that surpass anything that Britain has done – even allowing for the fact that the European Union is now introducing new controls in addition to anything being imposed by the UK government.
So where does that leave the different centres in relative terms? It remains unclear. That is partly because the sheer volume of rules being imposed is highly complex, opaque and unfinished. But another key factor is political volatility. Right now it is still uncertain, for example, just how far London will be forced to comply with EU rules, or whether US regulators will actually introduce all of the Volcker rule or CFTC position limits. And although the Occupy Wall Street – or Occupy City – protests have been vociferous, bankers are stepping up their attempts to prevent a regulatory clampdown, arguing that this will hurt the economy.
If the West lurches towards a recession, these arguments may gain ground. There is, in other words, still a vast amount to play for; perhaps it is time for New York’s Mayor Bloomberg and his London counterpart, Boris Johnson, to commission new comparative studies. It would make fascinating reading.
Gillian Tett image: Getty Images