We don’t know enough about how banks work
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I was interested to read the comments made by John Murray, consulting editor of Lending Strategy, on Mortgage Strategy Online recently regarding Bank of England governor Mervyn King’s call for radical banking reform.
Murray suggests that King is slow off the mark and the debate on who should be liable for failures in the banking system should have happened two years ago.
Banks had a long time to get themselves and us into trouble and I’m not sure that all the factors are yet on the table. If we had started this debate two years ago I suspect there would have been a lot of vindictive suggestions which could have made matters worse.
Part of the problem is that there seems to be two types of banking institution - retail and wholesale - and a range of risk-taking activities.
Banks are core to making our free market system function but most people do not fully understand what banks do.
To have a sensible debate the scope of lenders needs to be clarified, and this could lead to the conclusion that some activities should not be in the banking arena.
We need to be clear about the activities banks are permitted to undertake. If they step over the line they should give up any hope of central support
In other words, we need to be clear about the activities banks are permitted to undertake and if they step over the line they should give up any hope of central support. That alone would alter the perceived risk of institutions and therefore the cost of capital.
But before we get there we need a lot more information on the risk strategies that were core to the crisis and how effective any regulator could be in assessing these.
It’s all very well to propose a new banking structure but this also needs to be policed. Enron created an array of dummy companies to hide its true status. Bankers are at least as bright so regulation could be a nightmare.
GLEN MCKEOWN
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