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We'd better try to prevent future financial crises, says Baroness Kramer, because we're unlikely to be able to cure another.
I am not one who believes that bankers were born with the devil's spoon in their mouths. After all, for much of my career I was a banker. But I am still stunned at how little the banking industry has absorbed the implications of the recent financial crisis and bank bailouts.
The evidence given by major banks to the issues paper from the Independent Commission on Banking (ICB) is utterly disheartening, arguing that revised regulation, improved supervision and increased capital requirements are sufficient to prevent any future systemic collapse. Forgive me for being a cynic, but the eulogies for these measures seem more based on the recognition that they require the least action politically possible. Much more muted is any recognition of a role for structural change in the industry.
Individual banks have failed in the past and will fail in the future. In the last crisis, however, the failure of key banks could not be permitted because of their interconnections across the system and the domino effect of any failure– the 'too big to fail' syndrome. Regulation, supervision and increased capital requirements are all welcome, but it is hard to see that these change the structural nature of the problem. The taxpayer 'guarantee' standing behind a 'too-big-to-fail' bank is a subsidy too far, as well as an incentive to take risk. And while this is an industry which is supposed to carry and manage risk, pay incentives still militate against caution. The capacity to build layers of derivative transactions on top of faulty loans has escalated the consequence of poor risk decisions.
Sir John Vickers and his fellow ICB Commissioners face a daunting challenge. Separation of plain-vanilla, retail banking from high-risk investment banking, whether within the same bank (functional subsidiarisation) or by divestiture, has implications for costs and international competitiveness. But when someone like Alan Greenspan (former chairman of the US Federal Reserve Board and a man much associated with creating new global banks) says: "If they're too big to fail, they're too big", the time has come for radical action.
In his speeches Sir John has indicated that he recognises and will not duck the challenge. When it comes to future financial crises we can afford prevention, but I am not sure we can afford another cure.
Baroness Susan Kramer was MP for Richmond Park from 2005 until 2010. Kramer contested the seat at the general election in 2010 but came second to the Conservative Party candidate Zac Goldsmith by 4,091 votes.
A one-time student of Politics, Philosophy and Economics at Oxford University, Kramer was elected president of the Oxford Union in 1971. She began her career in finance, and rose to become a vice-president of Citibank in Chicago.
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