The second risk that may arise after we have left the EU, is the related but perhaps more prosaic issue of the flexibility of the UK’s regulatory framework and allocation of responsibilities within it – the division of tasks between Parliament, Government and the regulatory authorities. Much of our financial sector legislation and regulation has been made at the EU level. This has increasingly taken the form of extremely detailed EU primary and secondary legislation directly applicable in Member States.4  This approach has been justified as necessary in the EU by the need to prevent divergences between member states. The cost, however, as some have observed, is an over complex and rigid regulatory framework.5 As a preparatory step for Brexit, Parliament has ‘onshored’ EU legislation and regulation and also the allocation of responsibilities that lie behind it. At some point, post Brexit, we will, I think, need to address this rigidity and hard wiring of detail to ensure we have a coherent, effective and flexible regulatory system with appropriate accountability. How we do that will have an impact on how we address risks, at firm and at system level, in a fast changing financial system. Financial stability post-Brexit With that nod to the future, I will leave Brexit - for today at any rate – and turn to the examination question you have set for today – financial stability post Brexit. I would like to focus on the question of debt.
That might not matter were the consequences limited to the party-goers. But they are not. When the party ends, some innocent bystanders may lose their homes altogether. Moreover, the party-goers aren’t just deposit-taking banks. A wide range of financial institutions, including investment banks, monoline insurers, even hedge funds, have the potential to cause significant damage to the rest of the economy in the wake of their demise. Are they all to be helped to get home safely when the party ends? If so, will they all be regulated in the same way as banks? If not, how can we limit the potential cost to the taxpayer? Add to this the problem that many of these institutions are global in scope, but the responsibility for both regulation and rescue remains firmly at national level, and you can see why policy-makers get headaches as bad as the party-goers’. No individual bank, or indeed the authorities, can easily find a way out of this because their incentives are to continue in the same manner. There is, therefore, no point blaming anyone for the outcomes. But together we have to find an answer. Of course, excessively strict and detailed regulation would mean that there were no parties worth going to and the economy as a whole would suffer from a suppressed and inefficient financial sector.