In a recent blog post, David Murphy, a Visiting Professor at LSE Law School, argues that, in order to stimulate economic growth, the UK Government should reconsider the restrictive financial regulations enacted after the Global Financial Crisis.
The Labour Government has made clear that growth is a top priority. However, these efforts are likely to face headwinds, Murphy explains. The Office for Budget Responsibility's economic growth forecast is low. And, if those forecasts are not surpassed, the government may be forced to increase taxes, he warns. "[I]n order to grow, the economy requires access to funding," Murphy writes. “That largely comes from the financial system. So why hasn't the financial system's efficiency come under more scrutiny?”
Current regulations prioritize stability, requiring high bank capital levels and sidelining banks' roles in some markets. The Prudential Regulatory Authority (PRA), for example, focuses on safety and soundness, Murphy explains. This sometimes comes at the cost of financial efficiency and growth, he argues, like limiting insurers' investments in infrastructure.
Although secondary objectives like competition and economic competitiveness have been introduced, safety remains the primary mandate. Murphy suggests that revising the PRA's mandate to balance stability with financial efficiency might better serve economic needs. "Regulators should have a mandate which reflects the mission that politicians want them to undertake," he writes. Additionally, he recommends establishing an Office for Regulatory Performance to provide independent insights, allowing politicians to hold regulators accountable without solely relying on their internal evaluations.
Join The Discussion