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A Better Way to Regulate Banking

Anger At Bankers

BARCLAYS RAIDS PENSIONS TO OFFSET TAX ON BONUSES

Details buried in Barclays' (BARC.L) annual accounts show the bank raided the pension benefits of 17,000 front-line staff to offset tax on the bonuses of its high-earning investment bankers.

Barclays profited by 371 million pounds from closing its final salary scheme to existing members last year, with a "voluntary" top up of 150 million pounds reducing the net figure to 221 million pounds.

The figure is almost the equivalent to the 225 million pounds Barclays paid in tax on the 2.2 billion pounds it awarded Barclays Capital staff. Barclays said changes to the pension scheme were made before any decisions on the bonus tax were made.

Video: GMTV 26 Jan 2010

- Singer Billy Bragg tells GMTV why hes launched a campaign to stop bank bonuses

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But Party Politicians Ignore It

None of the major Parties are going to do much about Bank Bonuses - Neil Prothero explains why bonuses and bank break ups are not on any party's agenda Video: Economist TV 12 March 2010

Why Bank Regulation is Different …

… how it has been used for personal as well as Party Political benefit, and why our current Political Elites remain in bed with ‘the City’

London Banking Riots

Early bank regulation took the form of restricting entry into banking to produce monopoly banks. Governments, officials, and their friends either owned these banks or got loans at favourable interest rates. Banks' activities were generally restricted to benefit their competitors. Consumers were and still are the losers.

Article Why Regulate Banks? Benston & Kaufman

Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines.Wikepedia article “Bank Regulation”

Bank Regulation Has Failed

Party Political Government regulation of the banks has failed miserably. Video: Economist 19 March 2010

Succored by the City, unchallenged by the other Parties, our then Chancellor became the ‘Patsy’ of the financial sector, rewarding them with ‘Light Touch’ regulation for feigning respect for his ‘wisdom’.

Bankers Greed Was The Cause

There is widespread recognition that the financial crisis, which triggered the Great Recession, was significantly due to financial excess, particularly regarding real

Banling - we wonlt pay for thier crisis

estate lending.

Asking why the system go out of control in the first place, Shumeet Banerji responds that most bankers understood that they might face catastrophic institutional failure and enormous loss of personal wealth. The reason that this was not enough to keep them from taking such unprecedented risks seems to be that they were distracted by their own greed.

According to this view, these villains exploited the financial system for their own gargantuan end-of-year bonuses, got bailed out, and have every reason to do it again. Given this inherent moral hazard, it’s no wonder that so many political leaders in the United States, Europe, and elsewhere are eager to rein in bankers’ compensation Strategy & Business 23 Feb 2010

So, the toleration of periodic bouts of financial excess over the past two decades is seen as reflecting profound intellectual failure among central bankers, economists and Party Politicians who believed inflation targeting was a complete and sufficient policy framework. It also reflects lack of policy instruments for directly targeting financial market excess. With central banks relying on the single instrument of short term interest rates, this supported the argument using interest rates to target asset prices would inflict massive collateral damage on the rest of the economy. So nothing was done.

What Could Be Done

Policymakers are now looking to reform the financial system in hope of avoiding future crises. But they remain fixated on capital standards because that is what is

Crunch

already in place, even though there is a better way to regulate financial markets.

Firstly this can be through asset based reserve requirements (ABRR). These would extend margin requirements to a wide array of assets held by financial institutions. Easy to implement, ABRR use the tried and tested approach of reserve requirements. They are compatible with existing regulation (including capital standards), and would fill a hole regarding adequacy of financial policy instruments.

ABRR offer a simple solution to this problem by providing a new set of policy instruments that can target financial market excess, leaving interest rate policy free to manage the overall macroeconomic situation.Financial Times 10 Nov 2009

As Anthony Evans (Guardian 14 Sept 2009) argues, while many people see our present financial system as "laissez-faire", what we actually have is a nationalised organisation that holds a state-granted monopoly on the issuance of currency. If this were any industry other than finance, the Bank of England would be seen as the Soviet-style planning board.

So should Britain:-

  • legalise or further regulate insider trading?
  • repeal or strengthen legal tender laws?
  • continue to permit or eradicate ‘Crony Capitalism’?
  • effectively confiscate, or link bankers pay to risk & capital?
  • ... or something else entirely?

Please add your thoughts and ideas to the "Better Way to Regulate Banking" Forum, now

Video: Telegraph TV

RBS chief executive Stephen Hester defends the £1.6 billion in bonuses the bank is paying.