The Bank of England remains convinced that the banks are still allocating far too much capital to their investment banking arms and means to put a stop to this. The FPC is recommending that the Prudential Regulation Authority (PRA), which will take over bank regulation from the Financial Services Authority next month, should apply higher capital requirements “where banks are highly leveraged to their trading activities”.
As a report published on Wednesday by the Institute of Economic Affairs pointed out: “There was an idea that investment banking, described by the naïve as casino banking, was more risky than normal banking. This was quite the opposite of what had been the case in the UK, where the notable failures were of normal commercial banks [RBS and HBOS] which threatened the stability of their investment banking operations."
In fact, increasing the reliance of our largest banks on commercial and retail banking could be making them more, not less, risky. If you remove the drivers for banks to generate profits, then they become more risk-averse and less active generators of economic activity.
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