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?

  • Transform the financial institutions we already have including an end to TBTF by shrinking and breaking up Systemically Important Financial Institutions (SIFIs).
  • Separate commercial from investment banking activities (a ringfence).
  • Reduce financial firms’ reliance on wholesale and collateralised funding.
  • Allow states to introduce capital controls when necessary, 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 to direct lending and investment towards long term and environmentally beneficial projects.
  • Change where society lends and invests. Use regulation to incentivise and force lending and investments towards productive, long-term and environmentally beneficial projects and away from speculation.
  • Outlaw and discourage short term & speculative lending and investments, including food and commodity speculation.
  • To get finance where we need it, promote new and alternative financial institutions including public banks, stakeholder banksnetwork of people’s banks and ethical banks. Promote stakeholder and people’s pension and insurance providers.
  • Local, mutual and cooperative banks, pension and insurance providers and other financial institutions should 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.