Bank of England governor Mark Carney has defended the reforms of the post-crash financial system amid concerns that regulation is at a “fork in the road”.
But speaking in Washington DC Mr Carney also said that authorities should not try to legislate for every circumstance, hinting that the era of mega-fines might be coming to an end.
He said: “While fines and sanctions have roles in deterring misconduct, they will not, on their own, bring about the cultural change we need.
“In the view of UK authorities, we must move from an excessive reliance on punitive, ex post fines of firms to greater emphasis on more compelling ex ante incentives for individuals, and ultimately a more solid grounding in improved firm culture.”
He cited the economic impact of fines, with global misconduct costs reaching $320bn (£249bn) – money which he said could have been used to support $5trn (£3.9trn) in lending to households and businesses.
Defending the post-crash reforms, Mr Carney said banks were previously “woefully undercapitalised” but have now raised more than $1.5trn (£1.1trn) in capital.
But he said there was still work to be done, including completing the job of ending too big to fail.
He said Britain’s departure from the European Union would represent a “litmus test” for the future of international cooperation.
Mr Carney said: “The UK and the rest of the EU have exactly the same rules and the most highly developed frameworks of supervisory cooperation.
“Their capital and banking markets are already highly integrated. They have the potential to create the template for trade in financial services.”
Among the risks Mr Carney highlighted, which could threaten the progress he said had been made, was “fragmentation” coupled with a loss of trust and cooperation.
He said: “If authorities do not have sufficient confidence that their efforts to promote financial stability are being reciprocated elsewhere, then concerns about the risks of openness could intensify.
“If that happens, domestic authorities could impose local requirements on domestic entities of foreign firms.
“In a world where many banks and FMIs are highly interconnected that would generate significant inefficiencies, frustrating the benefits that flow from open trade and investment.”