Casino banking should be separated from traditional retail banking
The financial crisis we have just been through caused a sharp and deep recession. For the first time for a generation, the global economy itself shrank slightly. For tens of millions of people around the world that has meant unemployment. For the very poor, the impact has been severe.
The Millennium Development Goals seem even less attainable. Recent economic data has been encouraging, showing that government efforts to boost confidence have had an impact. Nevertheless, we cannot simply go back to ‘business as usual', as some in the banking sector seem to be doing.
Amidst talk of spending cuts, we must not lose sight of the need for a fundamental reform of the UK banking system to prevent this sort of disaster happening again. The government's forthcoming banking bill provides an opportunity. That is why the Christian Socialist Movement (CSM) is supporting a new Early Day Motion (EDM) calling for a separation between ‘casino' and retail banking and urging people to encourage their MP to sign this EDM (no 2008). The EDM has been tabled by CSM chair Alun Michael MP and is supported by John McFall MP, chair of the House of Commons Treasury Committee.
We know that the roots of the crisis lay in the US sub prime mortgage market. But if all that had happened was that a few investment banks made bad calls on some esoteric financial securities, we would not have suffered such a financial and economic meltdown. When the investment bank Lehman Brothers collapsed, it soon became apparent that the toxic assets with which it was associated were linked to banks all round the world. More traditional retail banks had also acquired exposure to these securities and so when the market for them collapsed, large holes appeared in the banks' balance sheets. The drop in confidence threatened their very existence, since banks rely on trust. We saw with Northern Rock what happens when that trust vanishes.
Last year it was almost the turn of Royal Bank of Scotland and others to fail. Royal Bank of Scotland had become entwined with the ‘casino' banking world and had even joined it in part. Government action was not able to prevent the subsequent drop in economic confidence as banks reined in lending and businesses and consumers understandably began to worry about the future.
There international consensus for tougher regulation must be sustained. Banks will need to keep more capital on their balance sheets. Bonus payments schemes will need to be focused on sustainable profits and prevent actions which threaten the system. Regulation should enforce transparency and control the amount of leverage on bank balance sheets.
Stronger regulation is essential, but it is not enough. Regulation will sometimes fail as with Northern Rock. Casino banking will either circumvent regulation or render it ineffective through financial innovation. Memories fade and, as economist Hyman Minsky highlighted, periods of stability encourage people to take more risks and regulatory regimes to relax. We have a moral obligation to address the problem at its heart. Traditional retail banks became mixed up in things they did not understand. Differences between investment banking and retail banking became blurred. We should stop that happening again by separating banks between those engaged in risky speculative banking and those carrying out traditional retail banking. Investment banks could engage in more risky ‘casino' type trades without threatening the whole financial system. Governments could let them go bust if they make mistakes. Retail banks would continue to have government support and deposits would be protected. Risks would be more accurately priced.
This matters to all of us because lives are being lost or damaged by the crisis. Somewhere along the way, banks lost a sense of the common good and became divorced from the rest of society. Banks are at the moment institutionally unable to change. So in the national interest, and driven by moral obligation, Labour must reform them so they become an effective part of the Good Society. That is why we must urge the government in its banking bill in the next session of Parliament to 'separate as well as regulate' to stop the banks gambling with our money.
By Stephen Beer & John Mitchell
John Mitchell is a CSM member. He worked for the World Bank for 17 years and was previously Director of the World Development Movement for 12 years. This article, which first appeared on the Compass website, represents the authors' personal opinion.
CSM is supporting Early Day Motion number 2008.
Compass Online, 19th October 2009, 19/10/2009