Safe for society

The financial sector should be less interconnected and its firms able to absorb their own losses. No private firm should be too-big-too-fail.

What’s the problem?

Which road is safer in a city centre, say near a school: one with large pedestrian areas, where traffic is reduced and slowed, or one where things like safety barriers are built so cars can go faster and still crash without killing the driver? Of course the first! Why then, when it comes to financial firms, should we let them get bigger and faster and try to protect ourselves from bigger more spectacular crashes?


What’s so bad about that?

The problem is that today’s financial sector is dominated by a few very large firms, which are too big to absorb their own losses and so interconnected that their failure could bring down the whole financial sector. We have not tried to stop banks and other firms from getting bigger and faster and more powerful, instead we are trying, largely in vain, to make their eventual crashes a bit less harmful for society. There is no doubt that when one of those banks gets into trouble we will all pay the price. And in the meantime, too-big-to-fail firms enjoy undue influence on policymakers and governments (the managers of big banks are sometimes described as “too big to jail”).

Ten years on from the last financial crisis we are still suffering the consequences – the European financial system is still reliant on the ECB for funding while inequality and poverty still haunt our societies. Commentators from across the spectrum think that a new crisis could be just around the corner and yet we have done nothing to get rid of our biggest banks – in 2011 we had 29 global systemically important banks, in 2017 we had 30! As we still haven’t recovered from the last crisis we will be in a worse place to deal with the consequences of the next one.


What’s the alternative?

Society should take firm steps to ensure that no single financial institution can be so big compared to the rest of the sector and the economy. We need policies to separate, simplify and shrink them with the target of having zero systemically important private financial firms.


How will it help?

Eliminating too-big-to fail financial firms would reduce the risk of crises and bailouts, allow smaller and more socially useful banks to compete fairly, reduce political corruption, reduce inequality, shrink shadow banks and increase trust in the financial sector. What are we waiting for?


What steps could we take to get started?

  • Bring an end to Too-Big-To-Fail by shrinking and breaking up Systemically Important Financial Institutions (SIFIs).
  • Separate banking activities, so that the commercial and investment activities are distinct (e.g. using a ring-fence).
  • Reduce financial firms’ reliance on wholesale and collateralised funding.
  • Allow states to manage international capital flows with the use of taxes or capital controls, especially for countries vulnerable to in- and out- flows of hot money.
  • Create a publicly owned and democratically accountable utility to handle payments and money transfers.
  • Make banks increase the share of their own equity in their balance sheet (capital adequacy rules) and reduce their total leverage (via leverage ratio rules).
  • Use capital adequacy rules and climate stress testing to direct lending and investment towards long term environmentally beneficial projects.
  • Change where society lends and invests. Use regulation to direct lending and investments towards productive, long-term and environmentally beneficial projects and away from speculation. Use sectoral lending targets, capital adequacy rules and other forms of credit guidance, including quotas or prohibitions on finance for unproductive or environmentally harmful activities.
  • Outlaw and discourage speculative, short term lending and investments, including food and commodity speculation. End the incredible waste of energy involved in very short term, speculative forms of finance such as high frequency trading and crypto-currency speculation (like bitcoin).
  • Promote public banks, stakeholder banks, network of people’s banks, ethical banks, and small banks.
  • Promote local, mutual and cooperative banks, pension and insurance providers and other financial institutions to give stakeholders a say in what gets financed.
  • Promote democratically accountable multi- and bi- lateral development and investment banks, including green investment banks.
  • Remove state aid, fiscal accounting, and other barriers to public banking.

How does this fit into the bigger picture?