At the Group of 20 summit in April, there was wide agreement on the main areas for regulatory reform: more and better-quality capital, countercyclical requirements, a wider regulatory net and a drive to bring more trading on to exchanges. There is less clarity on how radical those reforms need to be. Is it enough to plug these gaps, adjust the dials in the risk models and then get back to business as before?
In my view, three problems do call for more fundamental changes. The first is moral hazard. The Bank of England was criticised for worrying too much about this in 2007. Our timing was poor but the issue was real then and is much more significant now that ambiguity about the state’s willingness to let banks’ creditors suffer has been largely dispelled.
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