Bankers on Wednesday hit out against over-regulation of the finance industry, with the head of British giant Barclays warning that cutting big banks down would hurt employment and the economy.
The chairman of insurance market Lloyd’s of London, Lord Levene, said the finance industry should be left to regulate itself, while JP MorganChase International chairman Jacob Frenkel warned against the danger of excessive intervention.
But central bankers such as China’s deputy central bank chief Zhu Min said there was no reason for the finance industry to chase overly high returns on equity, while Mexico’s former top central banker Guillermo Ortiz said banks in emerging markets had suffered substantially less than those in developed economies because they were subject to tighter regulation.
“I have seen no evidence … to suggest that shrinking banks and making banks smaller and narrower is the answer,” Barclays’ Robert Diamond said at the World Economic Forum’s annual meeting in the Swiss mountain resort.
Diamond said banks had become big because they were “following the market, following free trade initiatives and have been providing an important function” helping to transfer risks across borders.
If banks become smaller, the “impact of that on jobs, on the economy, in particular global trade and on the economy, that would be very negative,” he warned.
Institutions such as banks that are regarded as ‘too big to fail’ was at the forefront of the financial crisis that erupted in 2007.
Some financial groups were found to be so large and so tightly woven into major economies that governments had to inject hundreds of billions of dollars to save them from bankruptcy instead of letting them fail.
Since the crisis, besides working towards an internationally agreed process to allow for the winding down of major financial firms in the event of a crisis, regulators are also considering whether big banks need to be scaled down.
US President Barack Obama last week announced plans to limit banks’ activities, forcing them to choose between proprietary activities such as trading in sometimes risky financial instruments for their own benefit — and traditional activities, like making loans and collecting deposits.
Diamond criticised Obama’s proposals, saying that it was difficult to differentiate proprietary from traditional activities.
Pointing to the bond market, he said Barclays was a key player in the market in which US bonds are also traded.
“There’s a real need for banks like Barclays which has the number one market share with the government to be an active trader,” he said.
He also insisted that it was the bank’s “obligations” to provide loans to corporate clients, who could use the funds to trade on private equity markets, blurring the lines between proprietary or more traditional activities.
“It’s very important to step back and be thoughtful about trading and risk in the banking industry,” he said.
“Having banks that are well managed, and willing to take risks, taking cross border risks is essential,” he added.
Lord Levene meanwhile called on regulators to allow the industry to right itself.
“The industry has to deal with it itself. That’s where we’re going to get recovery,” he said.
During the same discussion, JPMorganChase’s Frenkel also warned that the serious economic crisis was “a breeding ground for potentially bad policies.”
While agreeing that government intervention had prevented a meltdown during the crisis, he argued that there was a “danger however in excessive interventionism.”
But central bankers were unfazed in their push for tighter regulation.
Mexico’s Ortiz pointed to banks in emerging countries, and noted that local regulation — often stricter — “seems to have worked.”
Zhu Min also pointed out that the financial industry accounted for 16 times global gross domestic product during its peak.
“Do we need a 16 times financial industry for the real economy?” he asked.
He said the sector should be generating returns on equity of just about 10 percent.
“This is very much a service sector, you should not be shooting for 19-20 percent ROEs,” Zhu said.
“After this crisis, more regulation, I think is deserved,” he added.
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