New global rules have been proposed by the Financial Stability Board (FSB) to prevent banks that are too big to fail being bailed out by the taxpayer. The rules will allegedly ensure that 30 of the world’s biggest banks will hold enough capital to absorb any potential losses.
Mark Carney, governor of the Bank of England and chairman of the FSB, called this a ‘watershed’ moment. He claims the rules have been born out of the ‘totally unfair’ situation during the 2008 financial crisis where taxpayers were forced to bail out major banks. He told the BBC:
“The banks, their shareholders and their creditors got the benefit when things went well but when they went wrong the British public and subsequent generations picked up the bill. That’s going to end.”
Under the new system, bank shareholders and lenders to banks would become first in line to bear the brunt of future losses if banks could not pay out of their own resources. “Instead of having the public, governments and the taxpayer rescue banks when things go wrong,” Carney added, “the big institutions that hold the banks’ debt – not the depositors – will become the new shareholders of banks if they make mistakes.”
Undoubtedly this is a step in the right direction but it is important not to get too carried away just yet. Negotiations are very much in their provisional stages so there will be ample opportunity for banking lobby groups to work their magic. It certainly would be no surprise if the final draft of the agreement contained a clause of some kind indicating that banks could be bailed out if their collapse posed a threat to the national or international economy. If this were to be the case how much would really change?
The agreement seeks to appease a disaffected public but it is somewhat disheartening that it has taken this long to draft. The financial crisis of 2008 was by far the biggest in modern times. It rivaled the infamous depressions of the 1930’s and yet it has taken six years for any agreement of this type to take shape. Ironically, the banks deemed too big to fail back in 2008 have only got bigger. The banks have seemed relatively comfortable, considering the extent of the damage, while the public has been left to pick up the pieces.
Perhaps the most obvious flaw in the pre-2008 banking system was the lack of diversity in the market. Small groups of multinational banks effectively monopolised the sector and their domination was such that they truly were too big to fail. When crisis hit, governments had little choice but to bail them out and since then the system hasn’t really changed.
These proposals will ensure that banks hold more capital but do not address the issue of diversity. Breaking up the banks and cutting them down to smaller, more manageable corporations would pose far less risk of systemic collapse and rule out the possibility of a bank being too big to fail. It would also allow the economy to heal itself. There’s just one problem: the banks are so big and so powerful that governments simply do not have the authority to impose such a ruling. There is so much wealth in the sector that banks would never willingly break themselves up so the problem is likely to persist and pave the way for future crises.
The new rules have been published prior to this weekend’s G20 leaders’ meeting in Brisbane and are due to come into force from 2019. It’s a step in the right direction but the plans won’t solve what’s fundamentally wrong with the global financial system.
Header image rights; JJ