Skip to content

In:In the years leading up to the 2008 financial crisis, Britain allowed a financial system to develop that paid bankers too much to take too many risks. It had grown to such an extent that Adair Turner, the recently appointed head of the City’s regulator at the time, described the Square Mile’s operations as “socially useless”. However, memories are short in government. The City reforms proposed by Chancellor Jeremy Hunt earlier this month will unfortunately ditch the useful functions provided by finance in favor of useless ones.

Britain’s departure from the EU was supposed to be an opportunity to rethink the country’s stagnant economic model and reduce its dependence on the City. Instead, the financial sector has used its influence to eliminate threats to its dominance and then loosen the bonds that currently constrain it. Whatever promises to tame finances, little has changed. The sector remains the same size as a proportion of UK economic activity as it did in 2008. In some ways it is better for bankers. Their bonuses have been doubled. Banks that were considered “too big to fail” are now even bigger than they were.

Plans published by Mr Hunt this month included more than 30 reforms to financial services regulation that would help make Britain “competitive”, specifically giving the City watchdog a target. A similar direction was given to regulators before 2008, certainly a warning from the past about how risky this approach can be. The government’s package also seeks to replace some safeguards designed to prevent risky lending and investment practices that contributed to the financial crisis. Sir John Vickers, the economist who led the inquiry into UK banking after the 2008 crisis, warned that the chancellor could be taking Britain down a “very dangerous path”. It’s hard to disagree.

It’s been over a decade since the world’s financial system collapsed and governments had to bail out at the cost of trillions. Millions of people lost their jobs or suffered lower living standards due to the recession that followed the banking crisis. However, almost no bankers have faced legal sanctions for their involvement in the collapse. The UK introduced a law in 2016 that allows senior bankers to be jailed for up to seven years for making reckless decisions that lead to the failure of their institution. But no senior manager of any bank has been banned since then. Now Mr Hunt wants to loosen the law. This would be wrong. As reported by the BBC’s economic correspondent Andy Verity argued, the current regime should be strengthened, not weakened. He notes that bank directors are not responsible for laundering their ill-gotten gains to criminals.

Underlying these reforms is the fact that financial services in this country have lost their advantage to EU markets. Ministers have responded by deregulating to make City deals here cheaper and riskier to keep the hot money flowing. Banks used to provide capital for manufacturing companies. The company would issue shares or bonds and the financiers would make sure the capital was available. Investors were betting on companies to make money, but their motivation was to take ownership stakes. It would be better to return to this model than to provide an accelerator for the casino-like practices that are prevalent today. Mr. Hunt needs to handle the finances more, not less. Shadow banking, the hidden world of bond funds and cryptocurrencies, lacks meaningful oversight.

In the next financial crisis, it is not clear to regulators what is owed, to whom, and to whom. If the big bubble in shadow banking, which now accounts for nearly half of the world’s financial assets, bursts, it risks the deepest economic downturn ever seen.


Leave a Reply

Your email address will not be published. Required fields are marked *