Since the advent of the financial crisis in 2008, regulation has been touted as an effective remedy against future collapse. However, as Anthony Hamilton argues in the Evening Standard, there are concerns over how effective subsequent regulation has been.
The trade imbalance caused by the huge trade surpluses of China and Germany hasn't been addressed, even though doing so would reduce the amount of capital seeking investments, and thus arrest the fall in lending and investment standards. In other words, the amount of "toxic debt" could be reduced, meaning fewer failed businesses and fewer debts written off.
Looking at financial institutions, there's also room for more effective encouragement toward stability – Hamilton suggests that a shift in taxation would be an excellent start. Currently tax is levied on profits, which encourages banks to borrow more and become unstable. However, shifting tax to liabilities would have the opposite effect: encouraging a reduction in borrowings and an increase in capital base.
A balancing act
Similar problems remain unaddressed at a local level. Independent studies by the European Commission and the Association for Financial Markets in Europe in partnership with The Boston Consulting Group both argued that European companies were too reliant on debt and too wary of equity financing. This results in a similar imbalance to that seen at financial institutions.
Regulators may once more hold the balance. Hamilton suggests that attempts to strengthen market discipline by demanding safeguards like a "living will", so banks can be allowed to fail, jar with regulations that weaken discipline by introducing controls, like board vetting. Choosing one effective path or the other could be what finally swings small business opinion back behind equity investors, and that would solve a lot of economic problems.
A 2014 survey by the Department of Business Innovation and Skills found that 51% of businesses see regulation as an obstacle to business success, and the smaller the company, the more negative their opinion of regulation. Perhaps a more accurate stance for SMEs to take would be to engage with regulators and systems, and feed back for the greater good.
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