Proportionality and commerciality key to banking reforms

Regulators must ensure that last year’s market meltdown is never repeated, but should be careful to not over-react, warned Lloyd’s Chairman Lord Levene in a speech to business leaders in Paris.

Policymakers need a clear vision of the future that addresses the excesses of the past, Levene told guests at the Lloyd’s dinner in Paris, held at the British Ambassador’s residence.

“In my mind one thing is clear: this vision must tackle irresponsible risk taking and address the excessive reward culture that lost touch with reality,” said Levene.

But the furore over bankers’ bonuses is ‘essentially a side show’ he argued. “The crucial point is to ensure that risk taking is backed up by capital and careful analysis.”

Supervisors should ignore the clamour to impose punitive measures on financial firms that effectively punish them for previous indiscretions, which may stymie the industry’s ability to operate effectively in the future.

“It is crucial that regulators remember the importance of proportionality, commerciality and workability,” Levene said.

The new regime should not see the insurance industry, which emerged from the crisis relatively unscathed, being tarred with the same regulatory brush as banks, he contended.

Supervisors haggling over the shape of the new Solvency II rules for European insurers, which will radically change how the industry is regulated, need to balance the need for new rules on how companies manage and control their risks with additional requirements for them to put up adequate capital to back their exposures.

But Levene also cautioned against the temptation for businesses to become too averse to risk.

“I am not suggesting that anyone in the financial services should become a risk junkie, but nor should we shy away from necessary and well-judged risks. Risk is an essential part of any business,” he said.

Security is not the absence, but the good management of risk, Levene noted. “Insurers sell security when they buy risk. And without this exchange, there will be no growth, no innovation.”

Lloyd’s has managed its central resources prudently and did not dabble in insuring exotic financial products, meaning that it is currently in good shape. As a result, it retains a healthy appetite for risk and innovation, Levene said. “But it is the appetite of a gourmet, not a gourmand.”

Lloyd’s has strong links with France and has maintained an office in Paris for over 60 years. Stronger ties to provincial cities are important to Lloyd’s as these regional financial centres are the location for significant operations of the global brokers, as well as being the home of well-established independent brokers with whom Lloyd’s could forge important business relationships in the future.