Lew Coffey, one of Windsor’s analysts, answers questions from a Bloomberg interview.
Western governments have jointly and separately introduced a series of banking sector reforms to rein in risk. Do you think these haven’t been sufficient enough to prevent the next blowup and taxpayers paying the bill again? You mentioned shrinking or breaking the banks up as a solution to improve overall trust. Do you see political willingness to do so? Should we bring back Glass-Steagall in the US?
First, the solutions suggested by various governments seem to me to be essentially a grab bag of minimalist bandaids to patch up the self-inflicted wounds of the current arrangements….micro managing the status quo if you will. What’s required to reestablish investor confidence is a series of basic measures to simplify the business, isolate different kinds of risks into different boxes and increase transparency to outsiders.
Second the issue of breaking up the large Mega-Banks, some form of Glass-Steagall that separates commercial banking from investment banking would be very positive because it would tend to isolate different kinds of risk into separate entities that would be far less likely to pose systemic risks. In addition, some form of regulatory framework to limit the degree of concentration in the business would also be very positive for the same reasons. If one looks at the percentage of world deposits held by the 12 largest banks, the problem becomes self evident.
Third, the question of political will is the real stumbling block in all this. Quite honestly, there isn’t any! The function of intermediation that the finance business has evolved to perform, is so fundamental and so vital to economic stability and growth, that it can’t just be abandoned to a culture that seems peculiarly driven to arrogant excess. History is replete with example after example of financial crises brought about by the hubris of financiers who assume that to master finance is to master all else, and politicians who are dependent upon them in an increasingly cash intensive election and reelection process.