Onwards and outwards
Bankers who carp about regulation have received new ammunition from an unexpected source: the central banks’ own central bank. But the Bank for International Settlements (BIS) is no ally.
It may seem that the Basel-based organisation has been listening to the likes of JPMorgan boss Jamie Dimon. A new BIS report on how stricter bank rules might affect monetary policymaking says that tougher regulations could reduce the supply of credit to households and businesses, especially smaller ones. They might also accentuate asset price volatility in financial markets, while attenuating the impact of monetary policy changes on market interest rates and the real economy.
Central bankers are also aware that regulation could become more onerous once policy rates in major developed economies finally start rising. The BIS points out that bank deposits may then prove to be a less stable source of funding than the rules envision, because customers will lose out from parking money in relatively low-yielding bank accounts.
But for all the common concerns, commercial bankers and central bankers come to very different conclusions. The former are apt to warn that new regulation is sowing the seeds of the next crisis. The latter say the effects on monetary policymaking and its transmission to the economy will be “only limited and manageable”.
Managing may mean rate-setters being more accommodative than might have been the case in the old regulatory regime, the BIS says. They may also have to resort to unconventional monetary policies, such as asset purchases, more frequently than in the past. But it’s clear that, for central bankers, these are small prices to pay for a more robust banking system which has less scope to hurt the real economy.
And far from fretting overmuch about gripes from banks, policymakers are wondering whether they should be doing more to regulate, supervise and deal directly with non-banks, which are playing a growing role in lending to consumers and businesses. Regulation will roll on, not back.