Thinking Money | Free Financial Advice and Tips

Preventing a future financial crisis: Restraining the banks?

Posted on 28. Sep, 2009 in General News

Signs of a recovering global economy and performing stocks, and the bankers are quick to reward themselves with fat pay checks and bonuses again – to the dismay of the taxpayers whose moneys bailed the banks out of a crisis they caused in the first place due to such wanton living. Hardly any lessons learnt?

The key question now being grappled with by financial regulators and government technocrats is how to prevent a future financial crisis.

Some technical questions and answers

It is generally agreed that greater regulatory supervision and control by government is needed. It is also now agreed that the share capital of banks be raised and their quest for taking careless risk held in check. However, the big issues are political and philosophical in nature. For example, why are banks expected not to fail? What’s the best way to deal with banks whose actions socially counter-productive? How should the appetite for quick riches be addressed?

 In other words is finance an enemy to ethics and morality?

At the heart of the Pittsburg G-20 Summit the philosophical nature of the debate was expected. It was the U.S. and Britain (free-market proponents) versus France and Germany (proponents of a controlled free market) philosophies. But even in the US and Britain, many including financial experts are beginning to question the free-market system as the finance industry has grown beyond being socially responsible – a defeat of the purpose of prosperity – throwing the general society into chaos as evidenced by the financial crisis.

The debate over free-market and a controlled market is gone beyond academic debate. Government massive bailout responses in the wake of the financial crisis led to public outrage and call for greater public control of banks. Recent public outcry at the massive bonuses taken by bankers testifies of public expectation of ethical practices in the banking industry.

All is not well yet with the economies of US and Europe hence a call for banks to be restrained from taking irresponsible actions that can throw the economies back to a recession. After all, majority of big financial corporations are on government lifelines. Government bailouts will not be guaranteed in case of a relapse in the economy. President Barak made this point clear to bankers in the US.

However, the European Central Bank (ECB) is not entirely in favour of heavy control on banks. Instead, the ECB has proposed that banks be required to increase their share capital and be restricted on how far they can go in controlling their balance sheets.

Banks would also be expected to keep an amount of the credit they sell as asset-backed securities to ensure that they have a venture in what happens to those loans.

Others have called for banks to draft winding down policies to ensure that their activities can be ended in an orderly process incase they go bust. This will prevent the panic effect witnessed last year when the Lehman Brothers collapsed.