Aasof’s Reflections

The 1979 Banking Act introduced by the Labour Government, was the first UK Banking Act to put banking regulation on a statutory footing. ‘The words “bank” and “bankrupt” date from the 13th century when it was bankers bankrupting banks. In the 21st century, bankers are still bankrupting banks. But it is no longer just banks. In England and Wales alone, over half a million individuals and nearly 100,000 businesses have found themselves in insolvency since 2007. Internationally, a growing number of sovereign states face a similar fate’. [2011 Andy Haldane – Control rights (and wrongs)]

‘A complete separation between classic commercial banking and investment banking is needed, such as a new  Glass-Steagall Act.  The Vickers Commission recommendation for some degree of separation – with the imposition of the so-called ring-fence between the two – is at least a recognition of the need for such separation.

A complete structural separation would have been better than the ‘ring-fence’ proposed in the new legislation. Bankers will always find a way around a ring-fence, especially with an incentive to do so. Banking prudence in commercial banking – as distinct from the culture of investment banking – needs to be restored. A single organisation and shareholders responsible for two completely separate and opposed cultures is questionable.

The 1987 Banking Act explicitly strengthened the system of bank supervision, with a provision to create an ongoing dialogue between auditors and bank supervisors. The 1997 New Labour government may have avoided some of the 2007-8 banking disasters had they continued with the 1987 Banking Act provisions.

[Nigel Lawson – Forget Fred and focus on the real banking scandal]

Whether or not Lawson’s 1987 Banking Act could have prevented the consequences of the ‘2001 Financial Services and Market Act‘ is arguable, but as Nick Cohen wrote:

‘It is rare to find the causes for a national disaster encapsulated in the dull prose of an obscure measure. Helpfully, a concise explanation of why you and your children will be paying for the collapse of the banking and housing bubble into the 2020s are set out in the clauses of the 2001 Financial Services and Markets Act’.

The dull prose of an obscure measure aimed at controlling financial market operations; more often than not, compound public (taxpayer) exposure to any resulting financial crisis. The Coalition Government has now placed the Financial Services (Banking Reform) Bill before Parliament.  Building on the recommendations to the government, the Banking Reform Bill is meant to safeguard the banks and the taxpayer from another financial collapse. However, when enacted, they may be as damaging as the ‘2001 Financial Services and Market Act‘.

As Laurence Kotlikoff writes in The Economic Consequences of the Vickers Commission (pdf) (commissioned by Civitas):

The reforms will not prevent the next crisis, nor make it any less harmful, the general public remain exposed to the mis-selling and risk-taking of bankers.

Bankers’ stranglehold on the world’s economy and the political system facilitates recklessly self-serving behaviour. The world’s financial system is doomed to fail again because of bankers’ perverse secrecy, and because the interdependence of financial institutions forces governments to intervene when banks fail.

‘The Report concludes that: “A clear path to a safe financial system and a safe economy – Limited Purpose Banking – lay before this distinguished group of academics and financial practitioners [The Vickers Commission]. But they opted to gamble with High Street to placate Lombard Street. Had they left the system in its current sorry state, their failure would have been bad enough. But they have arguably made the financial system worse. Rather than focus on the two principal causes of the developed world’s financial crisis – opacity and leverage – they set about to ‘fix’ things that weren’t broken and had nothing to do with the crisis past or the crisis to come”.