Bank of England counting the cost of financial regulation

The cost of financial regulation to the banking industry will be looked at more closely by the Bank of England as it looks to do more to promote competition and investment. bank of england regulation costs

Chancellor George Osborne has amended the Bank’s remit to take account of the need for investment and competition, in addition to its core role of maintaining financial stability.

Banks have spent billions complying with a raft of new rules since the financial crisis. In the US, the costs of regulation on the six largest banking organisations hit more than $70 billion between the end of 2007 and 2014.

But the change to the Bank’s remit could be the first time regulators actively weigh the risk of instability against the costs of implementation.

Governor Mark Carney said the Bank’s Financial Policy Committee (FPC) would consider whether certain rules were counter-productive.

"The Committee will ... assess the cumulative effects of reforms to make the financial system more resilient and consider whether in aggregate they have unintended undesirable effects," Mr Carney wrote in a letter to the chancellor.

"Where appropriate, the Committee will consider whether the improvements in resilience from those reforms could be achieved in ways that are further supportive of strong, sustained and balanced growth."

Banking industry insiders have long voiced concern about the complexity of many new rules. In particular, the reduced liquidity in bond markets is creating volatility that many feel is the result of stricter regulation.

Alan Greenspan, the former Federal Reserve chair, has recently called for an increase in capital requirements for banks in favour of tougher regulation. He even called for Dodd-Frank to be “shelved” to end “its potential to distort the markets”.

“Lawmakers and regulators, given elevated capital buffers, need to be far less concerned about the quality of the banks’ loan and securities portfolios since any losses would be absorbed by shareholders, not taxpayers,” he wrote in the Financial Times.

Former FPC member Robert Jenkins agrees. He told Reuters that it was a matter of elevating capital buffers in order to reduce unnecessary regulation.  “If we resolve 'too big to fail' and require genuine accountability for failure, then we can and should roll back the rule book."