BANKS and free lunches traditionally go together. Lenders are run for private benefit, but taxpayers underwrite them if things go wrong. Yet the scale of support that has been extended in the current financial crisis is unprecedented: the entire system has been explicitly guaranteed. Even as unemployment soars, bankers are talking again of big bonuses and a “war for talent”. The woeful legacy of the crisis could be a supersized banking system gorging on the taxpayers’ tab.
Regulators want to prevent this, and their tool of choice now seems to be tighter capital-adequacy rules. This week Britain announced reforms that put a strong emphasis on capital (see article), and other countries are expected to do the same in the coming months. Even though banks have often found their way round such rules in the past, this approach probably makes sense for two reasons.
First, it reflects the lack of alternatives. Governments have turned away from the really radical options for reform because there is no easy way to resolve society’s desire for cheap and efficiently delivered credit with its wish for stability. Breaking up the biggest banks might not make them safer, and politicians seem not to have the stomach for the fight it would entail. Taking the banks into public ownership, to be micromanaged by politicians, has obvious drawbacks too.
See full Article.
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