Bankers on both sides of the Atlantic are lobbying furiously against stronger regulation. Authorities in different countries are reluctant to strengthen regulation as if the crisis never happened. The European Commission even hesitates to fully implement Basel III. In this debate, many argue that global competition requires a “level playing field”. Following this argument, and concerned about the City’s competitiveness, the Interim Report of the UK’s Independent Commission on Banking avoids proposing tougher regulation for investment banks.

These “level playing field” arguments are invalid. If banks impose costs and risks on a country’s economy, the country is better off with rules that limit the risks and costs even if others are not doing the same. The global economy is not a sporting event where a country’s athletes are expected to win as many medals as possible, but a system for the exchange of goods and services. In this system, the competitive successes of banks and the competitive failures of firms in other industries are two sides of the same coin. A country exports financial services and imports other products according to its comparative advantage.

In the UK, the rise of the financial sector over the past three decades was accompanied by a decline in manufacturing. This is not a coincidence. Banks are not just in competition in financial services markets. They are also in competition in markets for scarce talent. The highly talented people that they have drawn into the financial sector have not been available to other industries.