We under-regulated banks in the boom and are over-regulating them in the recovery, warns Redwood

Former Welsh Secretary John Redwood launches a timely warning in this morning's Sunday Express:

"Regulators should be told that our banks are now strong enough. They should take the pressure off for a bit and so allow more lending. They should only rein in once recovery is strong and credit growing much faster."

He continues:

"RBS is our largest bank and still in state hands. Last year it slashed its balance sheet by an eye-popping £700billion, more than £11,000 per person in the UK.  It cut its balance sheet by the same amount as total annual public spending! Yes, it is a global bank so it wasn’t all in the UK and it is also an investment bank as well as a retail bank so it wasn’t just loans to you and me that took the hit. However it is not surprising that it was tough to borrow when the biggest bank was slimming so drastically. So why was this happening? It’s because the regulators have lurched from boom to bust and are now making banks cut their lending in order to hit far more prudent targets. It was a pity they didn’t do that in 2006-7 when things were running away from us. Today they are tightening too much, leaving the economy short of credit when it needs a bit more to expand."

Unfortunately, global regulators are going in the wrong direction. At the recent G20 summit they agreed draft plans for a major raft of new financial sector regulations. A report from Price Waterhouse Coopers, reported in today's Observer, warns George Osborne that up to £1,000 billion could be drained from the financial system, depriving businesses of the credit they need to invest in jobs, expansion and exports.

We need a banking regulatory policy that is sensitive to the stage of the economic cycle. Hopefully the Bank of England, overseeing monetary policy, will be more sensitive to this than the FSA, as a stand-alone regulator.  George Osborne won the international argument against the fiscal stimulus. He now needs to win the international argument on cyclical regulation.

Tim Montgomerie