Obama and banking reform

Labour must grasp the nettle of separating banking activities

When president Obama announced a new set of bank reforms last week he changed the agenda for politicians and bankers alike. Obama announced a separation of banking activities and a limit to prevent banks becoming too large. In the UK, the government said it would not adopt the reforms here. Yet the financial crisis has forced governments to think the unthinkable and take the sort of action they previously opposed. Banking separation falls into that category. Labour needs to stay ahead of the reform agenda. Separating banking activities is essential to prevent another systemic financial crisis. It is also just the sort of reform a progressive party should be pursuing.

Such has been the inability of the banking sector to reform itself or fully acknowledge responsibility for the financial crisis, that ideas previously considered too radical are being seriously investigated. Before Lehman Brothers filed for bankruptcy, I argued on the Progress website that banks should pay an insurance premium against future bailouts. I cannot claim any credit but in any event it is now on the agenda. For years, those calling for a Tobin Tax were rebuffed. Now the Treasury is pushing the idea. We must hope for a similar about-turn on banking separation.

President Obama is calling for the establishment of the ‘Volcker Rule', named after the former Federal Reserve chairman who has advocated banking separation for some time. The rule limits the scope of banking by ruling out most proprietary trading and ownership or sponsorship of private equity and hedge funds. It also puts a limit on the size of banks, measured by market share. This latter measure might be a distraction because it focuses on size rather than systemic importance, a point Alistair Darling has made. Nevertheless, while we might debate some of the details the measures are attractive because they address what banks do rather than just how they behave. They come on the back of US moves to impose a banking levy, also ruled out by the UK.

We know that stronger regulation is essential and the UK government is pushing for this through the G20. However, we also know that over time regulations are eroded. We know this because we have just seen it happen. Regulators, bankers, and politicians alike were seduced by new risk models and so-called financial innovation, which turned out (once more) to be just new ways of borrowing more money. Banks are engaging in the debate on regulation but any attempt to change what they can actually do prompts cries of outrage. We have seen this with the reasonable demand that bonuses reflect profits and ability rather than the advantages given by government guarantees and easy money from the Bank of England. We are seeing it again with Obama's proposals.

The financial sector remains important to the UK economy and there is no reason to attack it unnecessarily. However, bank reform is in the national interest and in the City's interest. We all need banks which work and which do not threaten to bring down the whole system from time to time, taking billions of pounds of taxpayers' money in bailouts and guarantees in the process. That means we need to separate casino-style banking from retail banking, something the Christian Socialist Movement has been calling for in an early day motion. The problem the critics of banking separation face is that they cannot show how their alternative measures would better prevent another systemic crisis. 

A progressive banking policy will focus on ensuring that we have a banking sector which provides services to individuals and businesses, protected from systemic failure, while allowing ‘casino' banking activities to continue away from taxpayer guarantees. Obama is focusing voter outrage into essential reform. Labour has the opportunity to do the same.

Stephen Beer Stephen Beer is chair of Vauxhall CLP, the Christian Socialist Movement's political communications officer, and senior fund manager at the Central Finance Board of the Methodist Church. This article represents his personal opinion.

25 Jan 2010 12:27

 

Comments

• Posted by Sarah Howard on 27 January 2010, 10:06:43 AM Interestingly, this problem was presented two years ago via an article below where it was described in detail showing that banks were behind the investment in collectives but also how the CFTP let them. Blaming the banks because their regulator allowed the rules to be changed is a bit rich. An extract from the article will give you an idea of its accuracy as the world was heading for inflation - it said - forget that, cited the presentation to the Senate in San Francisco in 2008 May and said - worry about deflation. Two years later we have action and reaction. I wonder why. extract and link: At no point in the past has there been greater confusion about the future than today. I will attempt to explain why we are in such a state of flux by explaining the real culprit behind rising food and fuel. Stay with me on this one. The ‘bong’ news headlines brimmed with despair last week with reports about the price of oil. The world is doomed it would appear, or is it? On one side we have driving inflation caused by issues we cannot control (food and energy), and on the other side we have a plummeting economy with house prices taking a bashing, and the Times reporting that house completions dropped to a 30 year low. The news now reports that interest rates will have to rise to curb inflation! Are you really suggesting that I will eat less or drive less because you take money out of my pocket through interest rate rises? Whilst dealing with any matter I have always believed that if something does not make sense, it is either wrong or I am stupid. I always investigate both options. The real villain is purported to be two issues, namely the ‘credit crunch’ and food/energy costs driven up by excessive demand. Nothing could be further from the truth, and it is very concerning why nothing is being done about it. ..... http://www.wwfp.net/weekly-articles/23-june-08.html