The industry is facing regulatory upheaval - again. Since my last column, the Treasury issued its proposals for the new regulatory landscape post-crash, which effectively means replacing the FSA with new institutions operating under the Bank of England.

The Financial Policy Committee, like the Monetary Policy Committee, will take a long term look at the progress of the UK's economy, but its remit extends to identifying and dealing with asset bubbles as they form, and spotting other potential weaknesses in the financial system. The Financial Conduct Authority (formerly known as the Consumer Protection & Markets Authority) will deal largely with financial services, consumers and markets, while the Prudential Regulation Authority will look in detail at how individual firms manage risk within their business.

Also, in the EU, we have two new supervisory authorities to deal with: the European Banking Authority, based in London, and the European Securities and Markets Authority in Paris. Financial regulation continues to be carried out at a national level, but the new authorities can impose binding technical standards on member states and can overrule national regulators where an EU law has been breached.

But the often untold story is that alongside all of this regulatory reform, the banks themselves have already been making substantial changes to the way they conduct their business. Banks are now operating with more capital and liquidity, with top to bottom changes to risk control and transparency in ethics and in governance. They have made major changes to remuneration and are much more transparent and committed to meeting their societal obligations. These are only a few of the changes - indeed, there are so many it is difficult to describe the scope, range and impact of all the alterations underway.

The changes follow three broad themes. First there is the stability programme, centred on the work of the Basel Committee for Banking Supervision and its calculation of capital and liquidity requirements for the world's banks (Basel III). Second, the regulatory institutions have been overhauled - in the UK, the EU and internationally. And thirdly, recovery and resolution plans - so-called ‘living wills' - have been put in place, so that financial institutions never again have to turn to the taxpayer for support.

There are of course significant costs and implications. Two broad studies have been undertaken on what these changes mean. One has been done by an international consortium of the industry which basically said that every 1% capital ratio increase would flow through to a 1% adverse impact on the economy. Too extreme a conclusion -  wrong. The other has been done by international authorities and has said that that every 1% capital increase would have a negligible impact on the economy. Again too extreme; again wrong. Both these represent the outside parameters. As is so often the case, the truth is somewhere in between.

If I look at only the UK for example, the banks have had to raise something in excess of an additional £160 billion worth of capital over the last two years. That is a substantial amount of money and it has now added to the fixed cost of a bank being in business in the UK (and abroad, as the Basel Committee's standards are applied gradually in other jurisdictions).

The UK itself has put in place a liquidity regime that requires the banks to hold more cash, or cash-lookalikes, defined here as gilts. The Basel proposals see the new liquidity regime commencing in four years time; the UK implemented the standards one year ago. While evidently it is far from unreasonable to expect the banking industry to hold more liquidity, there are three things worth pausing to consider here:

■ there is inevitably a cost involved, which again adds to the fixed costs of being in business.

■ our almost uniquely narrow interpretation of what counts as a liquidity instrument is resulting in the banks holding more and more gilts, and so being more and dependent on governments taking sensible fiscal decisions.

■ the UK's restriction on the use of such instruments as covered bonds - which are permitted under the Basel rules - impact the ability to increase the supply of loans such as mortgages.

The simple truth for any business is that you cannot increase fixed costs without a consequent impact on the cost and availability of services.  The implementation of new standards early, and the super-equivalent way in which the UK has applied existing European and other requirements, not only means that there is a constraint on the international competitiveness of the banking industry in this country compared to others, but most importantly this constraint flows directly through to the economy and economic growth.

We cannot continue down a path that says regulatory changes only have an impact on banks. Where changes have a societal impact, they need to be discussed from that perspective. It cannot be ignored or parked on the industry as if it is an industry -only problem. If a decision is being taken which says that in the interest of stability we will restrict loans and restrict mortgages, then so be it. But that is a policymaker's decision; it is not a decision of the banks. 

If one looks to see which countries are rebounding best economically they are those with governments who ran their public finances well in the years leading up to the banking crisis - not the case in the UK. The banks are responsible for banking, but they are not responsible for allowing public expenditure to balloon.

Regulatory reform is not about moving goalposts, still less rearranging deckchairs, but the scant public debate on the matter constantly alleges one or the other. We need a society-wide debate, so that we can understand and agree the outcomes we need - as an economy and as a society - from reform of the financial system.

Angela Knight is the chief executive of the British Bankers' Association

This article appears in the April 2011 issue of Banking Technology. Register to receive regular copies.