Monday, 18 March 2013
This week parliament discussed ways to prevent a future crisis in banking with the introduction of the Banking Reform Bill which will bring in new regulations to prevent the sort of risky behaviour which led to the banking crisis and contributed to the global recession which we have been grappling with for five years.
At the very heart of the new legislation is a requirement for banks to clearly separate into different legal entities their retail banking operations (that is to say the day to day banking on the high street) from their so called investment banking arms, which is often appropriately dubbed “casino banking” and has involved traders placing large bets on the financial markets using other people’s money as if it were their own.
There are a number of things we need to achieve to clean up the banking industry. Firstly, we need to end the situation where individual banks have become too big to fail. At the height of the credit crunch, most banking institutions were so huge, that the cost to the wider economy of letting them go bust was too high for governments to contemplate. We need to break the banking industry up so that, in future, there are many smaller banks fighting each other for customers, but where any one of them could go bust and it wouldn’t matter. That way, they would no longer be able to hold the taxpayer to ransom for their own mistakes.
Secondly, it is absolutely right to require the legal separation of retail banking from casino banking in law. The world of investment banking had grown completely out of control by the time of the financial crisis with toxic debt being bundled up and sold on to the next institution and then treated as if it were an asset against which to borrow and speculate even more. It became like a giant game of pass-the-parcel and the tax payer was left holding the debt when the music stopped. By forcing the legal separation of investment banking from retail banking, those of us working in the real economy could be insulated from the risks being taken by city traders because they would not be allowed to use the public’s savings to gamble as they were in the past.
Finally, we need to tackle the high pay culture in the banking industry. Some claim that you have to pay seven figure salaries to the top jobs in the city in order to get the best talent. The truth is that these grotesque pay packages are not actually driven by market forces at all but instead they represent a high pay culture that grew up in an era of false affluence. That era has now ended and so must the high pay culture that went with it.
George Eustice can be contacted at firstname.lastname@example.org or 1 Trevenson Street, Camborne, Cornwall TR14 8JD or by telephone on 020 72197032.