Regulating European Banking

31st March, 2009

Not the sexiest title I have ever put on a post I know but I spent most of my afternoon on this topic. The EU Affairs Committee was presented to on the Larosiere Report by the Department of Finance. These are the current proposals to reform European banking and regulation.

These proposals look at setting up a common rule book for banks that would be regulated by a number of different bodies. My main points on the report were:-

  1. Firstly, that all of this should be done by a single regulator. So many of our banks stretch across many different kinds of economic activity. They are all interlinked. We need a single body that can see across these links and monitor companies accordingly.
  2. Secondly, the plan argues that compensation packages should be structured to deliver long term share holder return. The idea is that this will reduce risky behaviour. I disputed this. Some companies are of such critical importance to national and global economic health that payment must take account of wider considerations than shareholder value.
  3. Finally, we must accelerate proposals to price derivative financial assets. To quote Warren Buffett they are weapons of mass financial destruction. We need to be able to price them and assess their risk accordingly.

A very interesting committee meeting. Wonder if anyone listened!