Saturday, June 30, 2012

Telegraph's Liam Halligan adds voice to call for 'genuine bank reform'

In his Telegraph column, Liam Halligan points out the need for reform of the banking system and how the reforms being proposed so far are inadequate.

Regular readers know that the reason the reforms are inadequate is that they do not address the issue of opacity in the financial system.

If you do not address opacity, you do not get the banks to recognize their losses and remove the burden from supporting the excess debt in the financial system from the real economy.

If you do not address opacity, you do not change the culture of banking which uses opacity to hide its bad behavior.

If you do not address opacity, you continue to erode confidence in the financial system that is necessary for investors to return to worrying about the return on their investment and not just the return of their investment.

Around the eurozone’s neck continues to sit the crippling bank-sovereign “doom loop”. Debt-soaked banks are dragging down fiscally-precarious states, the resulting high yields then stymieing growth, making bank balance sheets look even worse. 
The circle will only be broken, of course, once politically-connected banks are busted up and their creditors forced to take losses. This has yet to happen in Western Europe - and, until it does, we’ll keep lurching from crisis to crisis. 
And then there is the UK. Last Wednesday, Barclays was fined £290m for conspiring to fix global interest rates. The manipulation of Libor has cost consumers, businesses and investors tens of billions of pounds. 
Although Britain sits smugly outside the eurozone, our banking predicament is even worse. Why? Because the UK’s banking sector is absolutely enormous, with balance sheets totalling more than four-and-a-half times’ annual GDP. In proportionate terms, this is more than seven times the size of all US banks. 
Amid a growing sense of national outrage, David Cameron says that addressing the Libor scandal is “frankly, as vital as dealing with the unsustainable debts left by the last government”. 
It is not “as vital”, Prime Minister. It’s part of the very same problem.
Britain’s banks are, quite clearly, out of control. The Government hasn’t even got the guts to implement the extremely weak “Vickers reform” - which supposedly set up a firewall between investment and commercial banking. 
Well, history shows that firewalls don’t work, which is why we desperately need a proper “Glass-Steagall” split. Unless we get one, then the on-going use of ordinary deposits to finance investment bankers’ bets will result in yet more UK bank bail-outs. 
Given the rescues we’ve seen so far, and the gargantuan size of our bloated banking sector, this is something the UK simply can’t afford. 
If the combination of the eurozone “doom-loop” and “Libor-gate” aren’t enough to galvanise our politicians into imposing genuine banking reform, then I really do despair for the future of my native country.

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