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May 20, 2010

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Iang

City of London can be expected to talk for their citizenry, which are the banks.

What do the banks want? Well, their incentives are clear, they wish to make money. And money is made from business to them.

Which leads to two conflicting objectives. Traditionally, the strategy of such players is to support the erection of barriers to entry. This is supported by stronger and stronger regulation, which is expensive to implement, and therefore promotes large players at the expense of small players. So the report will promote regulation.

But, there is a limitation on that, in that the regulation is primarily London or UK based. So, there is an important game going on here examining the effects of local regulation versus foreign regulation. Of course, London has always been known for its relatively light hand, which has encouraged business.

The answer then is that the banks want relatively heavy regulation in order to protect them from domestic competitors (perhaps not Tescos into swaps, but supermarkets eating their deposit base is a big impact). Meanwhile they want relatively light regulation because this attracts world wide business.

Whether they can successfully walk that line depends on .. many factors. Possibly the pendulum is swinging away from banks controlling the agenda, as directives from Europe are tending (hoping?) to reduce the barriers to entry into the markets of interest (PSD, etc) and the popular vote is strongly against them at the moment.

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