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: Marketing Manager (B2B) - Romford - £40,000 + car

£35000 - £40000 per annum + car and benefits: Ashdown Group: Marketing Manager...

Ashdown Group: Helpdesk Analyst - Devon - £20,000

£18000 - £20000 per annum: Ashdown Group: Helpdesk Analyst - Devon - £20,000 ...

Ashdown Group: Data Scientist - London - £50,000 + bonus

£35000 - £50000 per annum + generous bonus: Ashdown Group: Business Analytics ...

Ashdown Group: IT Project Coordinator (Software Development) - Kingston

£45000 - £50000 per annum: Ashdown Group: IT Project Coordinator (Software Dev...

Day In a Page

Read Next
David Blunkett joins the Labour candidate for Redcar Anna Turley on a campaigning visit last month  

General Election 2015: Politics is the messy art of compromise, unpopular as it may be

David Blunkett
File: David Cameron offers a toast during a State Dinner in his honour March 14, 2012  

Vote Tory and you’re voting for the rich to get richer and the poor to get poorer

Mark Steel
General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

'We will not sit down with Nicola Sturgeon'

In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

How ordinary Britons celebrated VE Day

Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
They came in with William Caxton's printing press, but typefaces still matter in the digital age

Typefaces still matter in the digital age

A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

'Missing link' between Earth's two life-forms found

New microbial species tells us something about our dark past, say scientists
The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

Pan Am Experience: A 'flight' back to the 70s

Tim Walker checks in and checks out a four-hour journey with a difference
Humans aren't alone in indulging in politics - it's everywhere in the animal world

Humans aren't alone in indulging in politics

Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

Crisp sales are in decline

As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

Ronald McDonald the muse

A new wave of artists is taking inspiration from the fast food chain
13 best picnic blankets

13 best picnic blankets

Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

Barcelona vs Bayern Munich player ratings

Lionel Messi scores twice - but does he score highest in our ratings?
Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

Explosive batsman who sets the range for Kiwis' big guns

Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'