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¶ … Turner review, published in March 2009, recommended that the banks increase their capital reserve levels, among other measures to prevent future financial crisis like the one that has just occurred. The British Banking Association pointed out to at least two negative effects that such a regulation could have on the British banking sector.
The first is that such a regulation would "banking regulation that you believe stifles economic growth" (Reuters, 2009). The logical, economical argumentation behind this statement is simple. With higher capital reserve requirements, banks will have less money to use for its financing activities and less funds to give out in credits to businesses in the country. If this is taken from an individual to an aggregate level, less funding will be available to businesses in the form of credit. In terms, with less available funding, businesses will not be able to relaunch their economic activities with investments and the overall effect at an aggregate level would be that the economic rebound will take longer and will be a more difficult process.
Second, the respective measure could, in the opinion of the British Banking Association, decrease the competitiveness of the British banking institutions on the global market (Reuters, 2009). The explanation for this derives from the issue discussed in the previous paragraph: a measure such as the regulation proposed will likely decrease the amount of funding that banks can use for its financial crediting activities, thus harming the core activity of any bank.
While both these arguments are logical and stand their own ground, the appropriate balance needs to be discovered between regulatory measures that can reduce the possibility of the financial crisis repeating itself in the future and the flexibility in the regulatory framework that would permit banks to retain their competitiveness.
Bibliography
1. New regulations could stifle lending say UK banks. June 2009. Reuters. On the Internet at http://in.reuters.com/article/governmentFilingsNews/idINLF40713520090615. Last retrieved on November 7, 2009
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