Banks a lot!

The debate over when and how to cut the structural deficit has dominated the General Election and the headlines. This has overshadowed much of the vital discussion on much-needed bank reform, even though bank-bashing was highly fashionable amongst politicians not so long ago.

Politicians have indeed outlined some ways they would tackle the banking sector. The Liberal Democrats have proposed a bank levy, a windfall tax on banks, and some uncertain measures to separate the retail and investment arms of banks. The Conservative and Labour party also propose a levy on banks, but on a global scale and in Labour’s case no tax would be imposed without a binding international agreement. However these policies seem to raise further tax revenue to cut the deficit rather than actually deal with the risky behavior that brought such instability to the Economy.

Nevertheless Central bankers and notably the Basel Committee on Banking Supervision have voiced a number of proposals, which can be implemented by national governments as they see fit, to ensure that the financial sector behaves more responsibly in the future.

Under the recent set of proposals, which build on the Basel II accord published in 2004, banks would be forced to hold more capital to insure against any bank runs. Leverage ratios would be limited so that no bank can undertake the levels of debt seen during the recent crisis. Furthermore, banks would be required to set aside more capital in boom times to manage against losses when markets fall.

These seem to be sensible ideas, but they are nothing revolutionary. They simply build upon older proposals such as those in 2004. Andy Haldane, the Bank of England’s executive director for financial stability, went a step further arguing that bank sizes and structures should actually be limited by law to prevent from being ‘too big to fail’ and in turn ‘too big to save’. Thus if one smaller bank is in crisis it does not affect the wider banking system. In fact, Mr Haldane likened this model to that of sleeper cells in Al-Qaeda!

It is likely that we will have to wait until after the election results to see whether any of the proposals discussed will be implemented but it is vital that politicians do not side-step the issue or bow to lobbying from the city as they have done in

the past.