As governments and financial institutions adapt to the new reality of life after the economic crisis, Philip Middleton, Leader of Ernst & Young’s EMEIA Financial Services Government practice, suggests that best structure for banking and financial services is yet to emerge.
The collapse of the financial markets proved just how interconnected and interdependent countries’ economies have become. Suddenly, the topic of reforming the banking system is not quite so remote, resulting in a growing debate in many countries.
Most agreed “it should never happen again.” This means that the conditions which provoked incipient collapse should be avoided, and that sufficient restrictions and protection should be built into the system to forestall potentially dangerous activity.
In other words, banking as a whole should become less profitable and less prone to major swings and volatility. Banking should be boring, safe and predictable and very closely monitored and supervised. It should serve the needs of the citizen rather than the interests of shareholders and employees.
It sounds uncontentious, but opponents would argue that removing incentive and innovation from banking is a bit like a sports car without fuel — it may look very pretty but it isn’t going to get you very far.
Shackling the banks, it is claimed, would restrict crucial components of globalized investment: trade and commerce. It would reduce economic growth significantly and condemn millions to poverty.
Should we simply accept that banking systems are prone to disruption and collapse every couple of decades or so, and make provisions for that? Or are the consequences of a banking collapse so unpleasant to contemplate that any price is worth paying to prevent it?
If we accept that ultimately the state is going to step in to bail out banks and reimburse depositors, it follows, some argue, that banks should pay for this protection.
In the first place, there seems to be consensus that retail depositors should be protected come what may, although less agreement as yet on the extent, the eligibility, and how it should be paid for.
If we know that in the event of banking collapse the state is going to step in to safeguard depositors, there will be absolutely no incentive for individuals to exercise any discretion at all in choosing where they put their savings, or to distinguish at all between well-managed banks and riskier ones.
In a democracy, some politicians may not want to risk citizens’ electoral wrath by suggesting that they should bear some measure of responsibility for the management of their own personal finances, and that banks do fail just as horses lose races.
And why should depositors receive preferential treatment ahead of other creditors such as the taxman or the stationery supplier? If we accept that ultimately the state is going to step in to bail out banks and reimburse depositors, it follows, some argue, that banks should pay for this protection.
However, proprietary trading, where the bank puts its own shareholders’ money at risk, should receive no state support in the event of failure and anyone doing business with such an entity would do so at their own risk.
Some policy-makers and voters are now considering sector-based approaches based on creating a mixed banking sector comprising state-owned investment and savings banks; mutually owned and cooperative organizations; heavily regulated private sector retail and commercial banks; and a handful of private sector traders. Some countries argue that they already have such a system and hence have not suffered a crisis.
Into this mix come considerations of national economic and industrial policy, together with a search for powerful and innovative solutions to the twin problems of dealing with national fiscal deficits, and providing for aging populations.
Just as government is set to play a significant role in financial services for a decade to come, so the debate about the best structure for banking and financial services is not yet close to a resolution.
