Financial regulation needs to be agreed at a global level to be effective, and political wrangling in the UK to reorder the regulatory bodies is like rearranging deckchairs on the Titanic, Sir Howard Davies, a former chairman of the Financial Services Authority, told CNBC.
“The key thing that needs to be done is to reform banking capital requirements globally,” Davies said.
UK Chancellor of the Exchequer Alistair Darling issued a White Paper Wednesday setting out the government's vision for the financial regulation and the tri-partite system.
A new stability council would be made of representatives from the Bank of England, the Financial Services Authority (FSA) and the Treasury, under Darling’s plans, in a bid to avert repeating the latest financial crisis.
The FSA would also have new responsibility for financial stability under the plans.
The UK’s Conservative opposition party slammed Darling’s new stability council and tri-partite arrangement and said that if they won power at the next general election, they would hand all banking regulatory power back to the Bank of England.
“I think the tri-partite system has completely failed, it’s dysfunctional,” George Osborne, shadow chancellor of the exchequer for the Conservative Party, told CNBC.
“It’s clear that you can’t really separate central banking from financial supervision, both macro and micro financial supervision, so therefore the Bank of England needs to take responsibility for insuring financial stability,” he said.
- Watch the full CNBC interview with George Osborne here >>>
Rearranging Deckchairs on the Titanic
However, political wrangling over which body should regulate the UK’s financial system is meaningless and can be likened to rearranging deckchairs on the sinking Titanic because of the global and interlinked nature of finance, Davies told CNBC.
Regulation “is a global question, we cannot do that on our own here, because our banks are too interlinked,” he said.
“What went wrong was not just whether it was the FSA or the central bank or whatever, it was the fundamentals of banking regulation globally,” he added.
- Watch the full CNBC interivew with Howard Davies here >>>
But establishing a global set or regulations for the financial system presents a new set of problems, according to David Bloom, global head foreign exchange strategy at HSBC.
“You just need one country to break away and everything will channel through them,” Bloom told CNBC.
The key to global regulation is to increase capital requirement levels, according to Davies. And the main lesson from the recent financial crisis is that there were insufficient capital requirements for the banks, he said.