The real root problem with regulating the banks is that the politicians are hand in glove with them. The Tories don’t even want to regulate the finance sector so long as it provides them with half their annual income year after year, not just the banks themselves, but the hedge fund billionaires as well. Worse still, no attempt whatever has been made to deal with the fundamental point of corruption – that whatever the big 5 banks do, they will be protected by the ‘implicit guarantee’ that the government will save them from themselves and bail them out because they’re ‘too big to fail’, too valuable an asset to lose, too crucial a part of running the State, etc. Risk-taking at a bank that will always be saved is like playing Russian roulette, but with someone else’s head.
The problem is not what the State does, but that its hand is forced. Knowing that governments must bail out banks means parts of finance have become a one-way bet. The IMF recently estimated that the world’s largest banks benefited from implicit government subsidies worth a total of $630bn in one year alone, 2011-12. This perversely makes debt cheap, and promotes leverage. In America meanwhile there are proposals for the government to act as a backstop fir the mortgage market, covering 90% of losses in a crisis. Again this pins risk on the public purse – it’s the same old pattern, socialise the losses and privatise the gains
Removing the subsidies banks enjoy will not only mean that debt becomes more expensive, so that equity holders will lose out on dividends and the cost of credit could rise. Much more importantly it means seriously tackling the need for the re-introduction of ‘moral hazard’, i.e the awareness that there will in future be no guarantee of State bailing-out or reimbursement for reckless or incompetent lending. It is inconceivable that that this will happen when the political establishment is so so deeply enmeshed in the finance sector. The evidence for that is the bail-out to the tune of £68bn, the failure to take any effective regulatory action against the banks for the last 8 years, the postponement of raised capital buffers under Basel III till 2019, the ditching of Martin Wheatley the attack-dog chief of the FCA after heavy bank lobbying, and now the imposition of the deadline of 2018 for any further claims for the 10m customers who were illegally mis-sold payment production claims they neither wanted or needed.
This will only change when that cosy, collusive, symbiotic relationship between State and finance is peeled away, made transparent, and transformed into a proper arm’s length working partnership. That requires a fundamental shift in the power structure, and the rise of Corbyn is the best hope in the last 50 years that this might be achieved.