Bear with me please, I promise not to go on about economics for a while after this, promise. But, since Alan Greenspan, former US Federal Reserve chief, told the BBC yesterday that the world will suffer another financial crisis, it got me thinking about controlling the big banks casino tendencies.
There’s been much discussion, including from my favourite economics commentator Liam Halligan, about the sort of controls that could be placed on big banks, so we don’t end up in another financial crisis.
One way is to separate the high street aspects of banking from the more risky investment banking, as we had in the past. Wonderfully, I’ve come across a brilliant description of how this might work in the Baseline Scenario blog,
“[Divide the financial universe] into Boring and Exciting. Boring services are the following:
- retail deposits
- loans to retail customers, including mortgages
- retail insurance, including annuity products
- any custodial service beyond traditional settlement
If you do any of those, then you are a Boring institution, you can do all Boring services, you face some significant regulations, and you get bailed out when necessary. If you do none of those, then you are an Exciting institution, you can do almost anything you want, and there is an ironclad rule preventing the government from bailing you out. Boring institutions cannot offer Exciting services (I think) and Exciting institutions cannot offer Boring services (that’s certain).
It feels like a modern version of Glass-Steagall (although I’m probably not doing it full justice) – create an explicit linkage between tight regulation and a government backstop, and protect the part of the financial system that affects ordinary people.”
The Baseline Scenario blog draws from another blog which comprehensively proposes how to regulate financial services. I warn you this blog post is very long, technical and American in context.