The New Two-Speed Financial System?
Governments have moved to take control of banks deemed "too important to fail". What is this actually going to mean?Essentially, we are seeing banks being nationalised in order to save them (and economies) from tumbling even further. Some banks, however have chosen not to rely on government stakeholdings to shore themselves up, preferring instead to raise new capital (HSBC) from investors or to sell assets (Barclays) to strengthen their capital base. This is likely to result (for the next few years anyway) in two different types of bank operating alongside each other: state-owned and private, with pros and cons for both sides. For the "state-owned" banks, the advantages will be:
* Implicit government guarantees;
* Access to further capital if needed (this may be politically unacceptable to taxpayers);
* Possible "first bite" at any lucrative government contracts (unlevel playing field?);
The disadvantages will be:
* The "stigma" of being nationalised;
* Possibly not being able to attract top talent needed to turn them around;
* Uncertainty over how overt government influence on management will be (potential for being asked to make loans to "politically sensitive" but economically unviable industries;
* Potential for increased bureaucracy;
* Potential for reduced innovation;
* Potential for compensation to be set at unrealistic levels.
The advantages for those banks that remain outside government hands will be the opposite of the disadvantages listed above. Similarly, the disadvantages will be the opposite of the advantages above. History tells us that non-government-owned banks generally fare better and can attract better management. Nationalisation or majority ownership should only be seen as a temporary solution and governments should rid themselves of their shareholdings as fast as possible to reimburse taxpayers who will have enough burden to carry for the foreseeable future. Equally, if the effect of nationalising is to stifle innovation and competition, this will ultimately harm consumers.
The secret in not letting such a problem arise again is firstly more effective regulation by regulators who understand the risks, are properly staffed by those with industry knowledge (who are paid accordingly), and are respected by those regulated and by government. This will cost more, and it is only fair that the institutions regulated pay the bulk of this. To make it fairer, institutions or those parts of their businesses classified as "higher risk" should pay more. If this risks making the UK market less attractive as a financial centre, then the taxpayer should be willing to shoulder a higher proportion of the regulator's cost as we have seen that the consequences of failure of regulation are much higher.
Secondly, we need to see a return to the concept of fiduciary duty imposed on those at the head of banks and other large financial institutions. There will still be a need to take higher risks, and for these the financial services industry needs to be properly re-structured and ring-fenced to prevent one bad apple spoiling the whole barrel. If capitalisation becomes an issue here, then either a new system of risk mitigation is needed, or riskier industries must be financed at government level. Until then, expect a two-speed system.
Labels: Financial
posted by William Martin @ 04:01
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