The taxpayer-funded bailout of banks after the 2008 crash may have been necessary to prevent the financial system from collapse but it established the notion that some banks were too big to fail, regardless of their conduct.
An article today by Martin Gruenberg, the chairman of the US Federal Deposit Insurance Corporation — which supervises the soundness of US financial institutions — and Paul Tucker, deputy governor of the Bank of England, makes clear that this is no longer acceptable. The rescue of the banks, they say, “will have made banking riskier if managers and creditors conclude that a bailout is part of the fabric of the system”.
So they propose a new plan to protect taxpayers. It would put the responsibility for dealing with the failure of an international institution — like Lehman Brothers — in the hands of a single national regulator. And it would require banks to hold sufficient capital in the bank’s head-quarters to protect taxpayers from having to rescue them.
This combination of prudential provision for failure and a clear chain of responsibility when a bank collapses is exactly what was lacking four years ago. The US-UK plan makes shareholders responsible for losses. Those who lent to the bank — unsecured creditors — would find the value of the debt is written down and any remaining debt converted to equity, which would mean the creditors would become shareholders.
Another aspect of the proposals is that they reflect the global character of banking: of the world’s 28 biggest globally significant institutions, 12 have core operations here or in the US. Co-operation makes sense. And managers of failed banks would be sacked: the principle of moral hazard extends to people.
The plan would come at a price. If banks have to put more capital aside to meet potential liabilities, they may be less able to lend as much to people and businesses as governments would like them to. And if the unsecured creditors of banks are to become their owners in the event of a collapse, it will mean the cost of credit for banks will go up. That increase will probably met by us, the customers. Still, these measures, as well as those already being drawn up here and the US and Europe, would help make banks behave more responsibly: they deserve serious consideration from ministers.
Joined-up London
THE opening of the new orbital rail link between Clapham Junction and Surrey Quays has delighted commuters, some of whom will see their journey time to work cut by as much as half an hour. The new stretch of line cost £75 million but it has significant benefits: it will mean that many people travelling from south to east London will not now have to use central stations such as Victoria, which are already overcrowded.
This extension of the Overground service also reinforces the case by Transport for London to take over the running of other commuter services from private train operators. If such a move would help expand services, commuters would be only to happy. London works better when it’s joined-up.
Fund for Jacintha
A FUND has been set up in the name of Jacintha Saldanha, the nurse who took her life after being duped in the
royal hospital hoax call. We may not yet know all the details of the case but it would be a positive move if
those involved contributed to her funeral costs and the support of her children.
