Banking reform: The limits of prudence

Since the financial crisis, regulatory requirements for banks have been considerably increased – in terms of capital, liquidity, risk management and governance standards and the depth of regulatory oversight. This intensification of regulation was undoubtedly needed and has materially strengthened the soundness and resilience of the banking system. Substantial progress has also been made in two consequential areas that needed remedial attention: the moral hazard of “too big to fail”; and banking-type activities outside the regulated framework. But what should be the limits of regulation? At what point does regulation begin to constrain competition and innovation in banking services to the point where banks are less able to provide the services to the wider economy which are their basic purpose?