Stephen Foley: Reasons to cheer a harder year for banks

US Outlook Don't burst a blood vessel as the bankers' bonus headlines roll in over the next few weeks. This bonus season marks the high-water mark for Wall Street rewards for failure. Here are 10 reasons your blood pressure will be lower at the end of 2010.

1. Banks will be less profitable

It was an infuriating year, 2009, but necessarily so. If 2008 had been about preventing the banking systems of the West from collapsing, then last year was about restoring it to health. Profits, and lots of them, were what was needed, no matter that it produced the unpleasant sight of banks handing out fat bonuses again while the rest of the economy remained in the grip of recession.

Stage two begins now. This is the regulatory effort requiring banks to hold more capital in reserve in case trading goes awry. That means fewer big bets, more modest profits and – therefore – a smaller pie to be shared out among employees.

Meanwhile, competition, reduced by the collapses and consolidation of the past 18 months, is also flowering again, and rising interest rates will curb the easy profits that banks have been able to make in 2009.

2. ...and they will start lending again

Worthy businesses and home buyers will be able to get loans in greater numbers as the year progresses and as healthier banks feel less need to hoard cash. It's all dependent on continuing improvements in the economy, of course, but there is an evens chance that job creation has already resumed in the US. We get the December numbers a week from now.

3. Government support will end

The Federal Reserve has set out a timetable to withdraw all emergency programmes it introduced to support the credit markets, and they should all be shut by mid-year. In the end, the schemes were more discussed than actually used; their very existence as a fall-back helped to restore confidence in the secondary markets where loans are bought and sold.

4. Taxpayers will get their money back

The $700bn bailout fund raised by Congress at the height of the 2008 panic will be shut to new business in October, by which time it will be on its way to returning a fat profit for the taxpayer. More than $200bn was never spent. Some $175bn has already been paid back. Most regional banks will wait to return their government loans, but dividends are rolling in all the while.

5. Get your own back on banks

Still mad at the big banks that became "too big to fail", and then promptly went to the brink of failure, safe in the knowledge that the taxpayer will bail them out? There's an intriguing grassroots campaign being got up on the internet (at that aims to persuade savers to pull their money from the Citigroups and Bank of Americas and put it into much smaller regional or community banks. I wouldn't bet on this being the beginning of the end of big banks, but it certainly feels good to rage against the machine.

6. New laws tackle "too big to fail"

Politicians are on the case, too. Hold the cynical groan: despite imperfections, there will soon be a new "resolution mechanism" which will allow for the orderly wind-down of firms whose sudden collapse in bankruptcy would be too disruptive to allow. Come the next AIG, creditors will have to absorb the losses, not the taxpayer.

7. Net closes on hedge funds

The G20 is co-ordinating an international effort to bring hedge fund activities under the purview of regulators. That ought to cut risk-taking and beggar-thy-neighbour deregulation, and make the filthiest lucre harder to come by.

8. Global imbalances are on the agenda

The credit crisis was a wake-up call to everyone that the US cannot indefinitely live on a credit card provided by China, but our recovery from crisis proves that these imbalances don't have to be resolved suddenly or catastrophically. Away from the atmosphere of panic, there is breathing room to develop a new economic consensus, something that can put the US financial system on sounder footing.

9. The professors arrive on the scene...

It has been striking just how few big new ideas there are about how to reshape global finance or the banking system of the West, in contrast to the dramatic acts of 1933, when investment banking and retail banking were separated in the US Glass-Steagall Act, and the John Maynard Keynes lightbulb went on. My guess is that the 2008 panic came and went too fast, but academic work is beginning to come through now. The Harvard professor Ken Rogoff has a sweeping book out on how housing bubbles are predictors of financial crises, and even the Fed chairman, Ben Bernanke, who came to prominence warning that central banks should not prick bubbles, appears to be reconsidering that position.

10. ...and so do the prosecutors

And finally, reducing our blood pressure requires not just being assured that the outrages of the credit crisis are easing and will be prevented in the future. There must be a reckoning, too, and that seems likely to come in 2010. Those bankers at the fraudulent end of the credit crisis, those who ran mortgage lending and trading businesses built on what they knew were toxic loans to indigent Americans, will find themselves in cuffs this year, I confidently predict. After Enron collapsed in 2001, it was two and a half years until its bosses found themselves doing the "perp walk" for the cameras. It's about time.