/ Money

G20 proposals won’t reform banking

Business meeting

It was pats on the back all round last week when the leaders of the G20 – a group of the world’s 20 wealthiest nations – came up with a set of new proposals to reform the world’s banking system. But will they work?

It turns out that solving the financial crisis was not so difficult after all. According to the G20, banks simply need to hold more capital on their books. Then, when the next financial meltdown comes around, they’ll have plenty of reserves to prevent them from going bust.

Problem solved (although not immediately, as the banks have all been given years to get round to doing this).

What’s the point of the proposal?

To my mind, the G20 proposals somewhat miss the point.

In Britain, our banks have become too big to fail. And while the instinctive answer might be to try and find ways to prevent them failing in the future, how about developing a more lasting solution? Find ways that we can let our banks go bust without putting the money of private individuals at risk, without destabilising the economy and without recourse to taxpayer funds.

This way, banks will be entirely accountable for the risks they take. Unlike today, where they have an implicit guarantee from the British government.

The industry needs an overhaul

Finding ways to allow banks to fail in an orderly manner was at the heart of the recommendations in the recent Future of Banking Commission report.

The Commission was set up at the end of last year by Which?, along with senior politicians from each of the main political parties. It’s tried to lay out the blueprint for a lasting banking reform, which puts customers at the heart of the banking model.

The G20 solution tinkers with the current system rather than taking the braver option of embarking on a complete overhaul of the industry.

If more radical reforms aren’t introduced, I expect that we won’t even need to wait another 80 years until we experience a banking crisis as bad as the one that we are just emerging from.

Comments
Profile photo of holman
Member

The commentators on the new USA framework of regulation and also on the G20 ideas for controlling banks nearly all seem to agree on one thing: that the real problem is that banks are too big to fail and the new proposals have themselves failed to deal with this.

If that is true, then we have most to worry about because the UK has a far too big a share of these huge banks (3 of the global top 5).

The answer the commentators offer is always the same – break up the big banks. I think that is a very questionable solution. I suspect the pattern of business would be the same if the top 10 banks were broken up to live again as the top 30 banks. And the core problem would still be trust between banks (not between banks and customers).

The commentators seldom consider the opposite: amalgamate the big banks so that there is just one per country. If the USA had just one big bank, then the crunch of 2007/08 could not have happened. The crunch was caused by the self-preserving lack of trust between the big banks. But if there were one big bank, the issue of lack of trust would not arise. And the issue of banks gambling amongst themselves with depositors money would be limited to cross-frontier bets.

OK, so we would lose competition and therefore innovation (it is claimed). But much of the most sophisticated innovation in financial engineering in the last 20 years has been innovation in gambling amongst banks. Good riddance.

But banks and bankers would make less money. So, instead, we prop up the existing banks with more capital and more fat for the next meltdown. Too big to fail with knobs on.

Profile photo of richard
Member

Did people really think that G20 would seriously restrict banks dealing for vast profits for the use of the rich??

Get real

What is required is better regulation on mortgages and consumer savings. – Inter bank dealings could be left alone provided an insurance system existed to ensure they could not go bankrupt – so consumer’s money is safe.

Will the CON DEMS do it? —– NO.

Profile photo of lau
Member

Banks should have to pay for the ‘insurance’ they are getting from the taxpayer, and levy made on a percenage of the bonus they pay over a certain limit (say 10,000), so that those who benefit most pay most.This should go to repay the debts we have incurred due to their incompetance.