I do find it strange that the the government and popular media think that the big banks are the most important part of our finance industry. While they’re huge in terms of capital, deposits, and even branches, they’re only part of the ‘City’. There’s fund management, insurance, and many other sectors in which the City of London excels. The failure to properly regulate the big banks does a disservice to all these non-banking businesses.

While Margaret Thatcher’s ‘Big Bang’ City deregulation in the 1980’s was a vital change that helped create the current UK finance sector, it shouldn’t preclude our revisiting banking regulation. The current concern is about ‘Moral hazard’, which describes the way that any failure in the investment banking side of the big banks is effectively supported by the taxpayer, because their primary role in the financial system.

Ok, time to get to the point. We need a fundamental rethink of banking regulation. It won’t be easy, and there may be odd consequences that result, but it’s time we now:

• separated ‘boring banking’ from ‘exciting banking’, now advocated by many of the most senior and well respected economists, such as Paul Volker, and even my favourite, Liam Halligan, who says, “Having wrecked our public finances, the UK’s political and financial elite must now work out a regulatory response to make our banking system safer.”
• required banks to progressively hold higher levels of cash, thus ensuring a smaller pool of cash to reward bankers.  

There’s a new book out by respected New York Times journalist Andrew Ross Sorkin, ‘Too Big To Fail’. I thin I need to read it.