City of London (Photo: Reuters)
Labour's House of Lords spokesperson for Treasury and Economic Affairs, Lord John Eatwell, has told IBTimes UK that the economic outlook for Britain is grim and that complex regulatory changes will hurt businesses and growth in the long term.
Speaking on the side-lines of the University of Southern California's (USC's) Global Conversation in London, Eatwell said that many of the proposed regulatory changes are becoming too complex, and that tweaks being made to initial proposals will undo most of the positive aspects of proposed changes, such as those outlined in the Vickers Report on banking reform.
"In the UK, we have failed to properly think about the financial system we want and how we are going to get there, so instead Britain is developing an incredibly complex regulatory system that will in turn create great distortions and loopholes that will become very difficult to manage," said Eatwell, who is also Professor of Economics at USC as well as President and Professor of Financial Policy at Queen's College, Cambridge.
"The other day Andy Haldane, the executive director for Financial Stability at the Bank of England even said that we need a much simpler approach and to not add to the complexity and major changes that are already being put in place," he added.
In the wake of the credit crisis of 2007 and the subsequent sovereign debt crisis that has spread across Europe, regulators and policy makers have tried to find ways to amend existing banking legislation in order to prevent a systemic collapse from happening again.
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In the UK, banks faced a crisis in liquidity after losing much of their balance sheet, which led to the government taking an 83 percent stake in the government and 42 percent stake in RBS.
Echoing the US 'Glass-Steagall Act' of 1933, which effectively split retail and investment banking for several decades, the Independent Commission on Banking's report, dubbed 'The Vickers Report' after its author, Sir John Vickers , has proposed the 'ring-fencing' of investment banking activities from traditional deposit-taking by 2019.
"The Glass-Steagall Act was very simple and there was a definable boundary between retail and investment banking. However, with all the amendments to the Vickers Report, including letting these banks sell complex derivatives to retail customers, the ring-fence the report is promoting is being eroded," said Eatwell.
"We are failing small to medium enterprises (SME) and by blowing a hole in the ring-fence, I don't see how the situation is going to improve. SMEs need the capital, know what they are paying for and by selling them products they will never understand is just going to be hugely damaging."
Some industry critics have voiced concern that by ring-fencing retail away from the more profitable investment banking operations, this may hurt the longer-term health of the bank's balance sheet. However, Eatwell believes this isn't the case.
"I am not saying that it won't be tough but I believe that retail banking will still be profitable and in turn help the stability of the overall system. The point that needs to be made is that if there is any problems with the investment banking arm, then it shouldn't impinge on customer deposits or the wider economy," said Eatwell.
This article is copyrighted by IBTimes.co.uk, the business news leader