Leading article: The screaming need for regulatory reform

The unreconstructed global banking sector still poses a real threat

Share
Related Topics

One year ago, the American investment bank Lehman Brothers went bankrupt. In the process it almost destroyed the global financial system. Twelve months on, some confidence has returned to financial markets. Several banks are reporting profits. But anyone who believes that the international financial system today is any safer than the one that plunged the world into chaos last September is deluded. If anything, the world's large banks pose an even greater danger to our economies than they did last autumn.

The number of banks has fallen. But those that remain now enjoy the implicit backing of national governments. Where once bankers speculated with the savings of ordinary depositors, they now do so with the money of taxpayers. Just as dangerously, there has been no real reckoning for those bankers who behaved so recklessly in the boom years. Aside from a handful of high-profile resignations, the managements of these institutions remain largely unchanged. This screams moral hazard. What precisely do these executives have to do to earn the sack?

There is certainly plenty of evidence that they are up to their old reckless ways. Obscene remuneration contracts are returning as banks compete for the "talent" able to generate fat profits from short-term speculation. Make no mistake: the seeds of the next banking crisis are already being sown.

So the need for regulatory reform is screamingly urgent. The question is: will those reforms materialise? There is much in President Obama's legislative proposals outlined to Congress yesterday (and also in the regulatory principles of the international Financial Stability Board) which is welcome. Banks should indeed be forced to hold more capital to absorb losses. And it is common sense that any financial institution large enough to pose a systemic risk should be closely scrutinised by the authorities. Bringing the sprawling derivative markets on to transparent exchanges is also vital for stability.

Sadly, the White House, like our own Government, lacks the appetite to go further. Our preference would be for banks deemed too big or interconnected to fail to be broken up and investment banking re-separated from retail banking. There is also scope for authorities, working together across borders, to be prescriptive over safe levels of employee remuneration. The existence of banking empires and a bloated bonus culture both significantly increase the overall level of risk in the financial system. Yet the best must not be made the enemy of the good. The reforms on the table are infinitely better than the status quo.

Some ask whether the goal of regulation should be to limit the contagion from future banking crashes or to prevent them happening in the first place. The sensible answer to that is: both. Of course, it is impossible for any regime to eliminate the possibility of a financial crash entirely. Instability is inherent in any free market economy. But it is a fallacy to conclude that all regulatory effort is therefore pointless. One of the key features of the era which ended with Lehman's demise was the obeisance of the authorities – especially in the US and the UK – to the idea that financial markets are essentially self-regulating.

It is not enough for governments now to acknowledge that this ideology was dangerous and wrong. They need to put in place the regulatory framework that will consign such complacency to the dustbin of history forever.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Recruitment Genius: Salesforce Developer

£50000 - £65000 per annum: Recruitment Genius: Due to continued business growt...

Recruitment Genius: Internal Sales Executive

£20000 - £22000 per annum: Recruitment Genius: An exciting opportunity has ari...

Recruitment Genius: Sales Executive

£20000 - £25000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

Read Next
Rachel Hollis posted a photo of herself in a bikini on holiday online with the caption 'I'm proud of this body and every mark on it'  

At last there’s a new ‘bikini body’ ideal – and it’s one with stretch marks

Victoria Richards
Ed Miliband contends with difficult questions from Jeremy Paxman  

Battle for Number 10: Miliband survives a rough ride but Cameron takes the edge in first TV battle

John Curtice
The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss