Posts Tagged ‘retail banking’

For true reformation of the financial system to take place, be effective and enforceable, it’s got to happen at the international level. Otherwise, banks and financial services companies can just do an end-run around it by moving out of the country.

While reforming the financial system in the U.S. boggles the mind — and, has yet to happen in any meaningful way — international reform presents a far bigger hurdle. At stake are issues of national sovereignty, national corporate interests, national and individual political ambition and the ability or lack of ability to subordinate all of these interests to the greater good. And that’s assuming agreement as to what the greater good requires, which will likely never happen.

I wrote about this for the now-defunct New York Society of Security Analysts journal, The Investment Professional in the Fall of 2009: Mending the Seams: International Regulatory Reform. In looking back over that story, not much has changed. Actually, maybe it has, for the worse. Because any momentum and willingness to reform has completely dissipated, at least from what I can see.

It’s back to business as usual, and that’s a shame, because we’re courting, at the very least, another financial crisis. Which could be worse than the last one. At least it will likely be different, which may be entertaining on some level, though no doubt devastating to millions of consumers who are barely making it financially right now.

That’s the other problem: the difficulty for regulators, even assuming agreement at the international level, is the tendency for the financial industry and the technology to always be one step ahead of regulators. Because when it’s an unknown unknown — in terms of where the next problem will occur — it’s difficult to address, even with the best will in the world. That’s tough even for known knowns, as Donald Rumsfeld would say, let alone known unkowns and unkown knowns.

Of course, we can argue that the last crisis was eminently foreseeable and preventable. A bubble inflated, regulations were either non-existent or ignored, problems reached critical mass and spread around the globe and the Fed, governments etc did what they thought they had to do to keep the global economy from catastrophe. Those actions are setting the stage for future problems, along with a very troubling lack of will to reform and to prosecute the offenders from the last crisis.

There’s also a compelling argument that there’s been an enormous expansion of high-risk lending on the part of retain bankers, including mortgages, corporate lending and personal loans. With governments around the world on the hook for guaranteeing deposits, the stage is set for another gigantic mess.

With a deposit guarantee, there’s no restraint on the bankers’ tendency to take big risks. Why should bankers restrain themselves? They know they are going to get bailed out. And what happens when the citizenry balks at bailing out these reckless retail bankers? Iceland, anyone?

And who are the real victims? The people who have lost their homes and the taxpayers who are on the hook for the millions of dollars, Euros and Pounds guaranteed by governments. As Frances Coppola points out (thanks to her for the ideas in these last few paragraphs) it’s a systemic problem.

Here are some links on point (some are dated, like my article, but still relevant):

  • The worm in the apple: what went wrong in retail banking¬†Frances Coppola explains the real reasons behind the financial crisis (reckless retail bankers plus lack of regulation plus government deposit guarantees) and why there is no easy answer. However, there is an answer because it is possible (thought not likely IMHO) to break the link between bank lending and economic growth. Follow Frances on Twitter if you’re interested in her engaging posts on this vital issue.
  • Reinventing finance¬†British Journalist Ian Fraser spoke passionately in Oct. 2009 about the need for financial reform and why it is vital that governments in the UK, US and Europe not resort to the quick fix.
  • Why we need to regulate the banks sooner, not later¬†Financial Times blogger Kenneth Rogoff argues that bailouts aren’t enough. In the absence of more regulation and enforcement of those regulations, nothing will change. Tip to @Ian_Fraser
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