Bookmark and ShareVeronika Thiel is a researcher and project manager on nef’s Access to Finance team.

Remember to think happy thoughts!

Remember to think happy thoughts!

As promised yesterday a short summary of thoughts on the Government White Paper: Reforming the financial markets.

Unsurprisingly, but sadly, the bigger picture has been missed. There are many reforms that tweak the system here an there, but few that will change the overall picture. The paper isn’t really committing the Government to do too much whilst trying to give the impression that decisive action is being taken.

Most disappointingly, Darling will not move to break up the bigger banks, following the concept of: if it’s too big to fail, it’s too bit. Zero points for this.

The second biggest problem is the lack of immediate reforms. Many of the proposed measures will not be implemented immediately, giving the opposition (i.e. most of the financial industry) plenty of time to mount a counter-offensive. The City has one aim to restore business as usual and that bonuses are back (or BAUBAB as I like to shorten it). One journalist likened the current atmosphere in the City to the end of Terminator 2 – just when you think that that horrible robot has been smashed to smithereens, it is reassembling. It is thus crucial to work fast and seize the opportunity to reform the financial system in a meaningful way. Unfortunately, party politics and bickering defuse the potential of decisive and effective action that would reduce the influence of finance on UK politics and economy. It appears that no-one at the top of either banking or politics has understood that finance should be subservient to the needs of the economy, not the other way round.

Also zero points on the issue of bankers’ bonuses: Darling talks the talk, but certainly does not walk the walk. The short section on pay suggests to draw up a code of conduct buy February and banks will have to report on their compliance with this code yearly. However, there is no indication yet what will happen to the banks if they fail to adhere to the code. Basically, we’ll be none the wiser until then.

The paper scores slightly better on the issue of pre-funding. Basically, pre-funding would mean that banks have to pay a part of their money into a pot as insurance against their potential collapse. This pot of money would then be used to repay depositors. There are some obvious advantages to this: instead of the Government having to cough up vast amounts of money at a moment’s notice, there is already some earmarked for it. A bank collapse will still be unpleasant, but it will be slightly less painful. Also, from a behavioural point of view, a levy on banks would remind them regularly of the potential of failure. Banks are, unsurprisingly, against this levy, as it reduces the amount of money they can use to invest. In addition, they say it’s expensive and puts an additional burden on them when they are trying to get back on their feet (needless to say they fail to point out that they stumbled over their own feet in the first place). But there are other factors at play: banks, as we all have learnt over the past year, rely very strongly on trust. So banks have to be trust-worthy institutions in order to attract clients and make investments. That’s why individual banks cannot say that they will insure themselves against failure – that would be paramount to suggesting that they are not sure that their bank’s strategy is foolproof. Bankers might say that banks in general collapse once in a while, but they would not be able to concede this possibility for their own bank – investors would be scared away (I personally would trust a bank that was a bit more realistic and didn’t pretend it would know everything, and hence took out insurance against failure. But then, that’s just me….)

To get over this dilemma is simple – make it compulsory for every bank to have insurance. Of course, this may still tar the reputation of the whole of the banking sector a bit, as it indicates that banking collapses are not as rare as some would have you believe. That again could be a good thing: prudence is also required on the side of the consumer. So, if Darling really introduces this levy, that would be a step in the right direction.

There are also some great ideas on counter-cyclical measures: make sure that banks build capital in the good times to use them in the bad times. That kind of thinking is definitively the clever one, and if the regulations are strong enough to prevent banks from getting around them, then they will do more for financial stability than many other suggested measures. The question-marks are around the how and when – and especially the ‘when’ is urgent because of aforementioned efforts to reinstate the previous state of affairs.

If you want a digested read digested: we don’t know what will happen until it may be too late.

On that cheery note, I recommend you read some something relaxing now – such as our suggestions on five ways to well-being. Money, after all, isn’t everything.