Why should we be experimenting where the cost of failure could be substantial when there is a simpler alternative solution that we know works and achieves the same result?
In the case of ring-fencing, ultra transparency is a much simpler, more effective solution.
By making the banks disclose on an ongoing basis their current asset, liability and off-balance sheet exposure details, proprietary trading is effectively ended. In addition, we bring about a culture change as ultra transparency ushers in sunlight to act as the best disinfectant (no more manipulation of Libor and other rates).
Britain's lenders will have to be broken up if the ring-fence to protect their retail banking operations from “casino” investment banking proves to be “permeable”, warned Martin Taylor, one of the policy’s architects .By definition the ring-fence will be permeable. The question is how many loopholes there will be in the complex rules implement ring-fencing.
Martin Taylor, who sat on the Government’s Independent Commission on Banking (ICB) that proposed ring-fencing, said “there would be a case for going further” if the firewall was “unworkable”....Given that the bank lobbyists were able to undermine Glass-Steagall, you can rest assured that the firewall will prove "unworkable".
Asked by the Parliamentary Commission on Banking Standards whether full separation would have been preferable, Mr Taylor, a former Barclays chief executive, said ... “If the industry is unreformable, then a full split will be necessary.”...We already have confirmation through the customer conduct issues and the manipulation of Libor and other interest rates that the industry is un-reformable.
While welcoming the Government’s decision to adopt ring-fencing, Mr Taylor said the Chancellor had made a “mistake” in watering down other proposals.
Letting banks build balance sheets that are 33 times their capital base, rather than the 25 times recommended, was “simply a mistake”, and allowing derivatives inside the retail bank was “the thin end of the wedge” as such complex instruments could be used to breach the rules.
“I prefer prohibition. It’s very simple,” Mr Taylor said. “Because I want to keep the ring-fence impermeable, I want to keep things simple.”...If Mr. Taylor wants simplicity, then he should love requiring the banks to provide ultra transparency.
When market participants can see what the banks are doing, it is easy for market participants to exert discipline and restrain the banks from risk taking and bad behavior.
Mr Taylor also claimed that regulation has not helped by treating the industry as a “rapacious” animal that need to be “tied up in red tape” rather than focus a “duty of care to clients”.
“We have dangerous dogs walking around with muzzles on. What I would like to see is some family pets as well.”Regular readers know that complex regulation and regulatory oversight are a substitute for transparency and market discipline.
Transparency and market discipline are much more effective at turning banks into socially useful organizations.