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.