Tuesday, October 13, 2009

Anthony Bolton: A seven-point banking plan

Over my 38 years in the investment business I have experienced six banking crises, starting with the UK secondary banking collapse of the mid-1970s.

Since then I have witnessed the Latin American debt crisis of the 1980s, the American savings and loan debacle, problems in Scandinavia in the early 1990s and later that decade in Asia. The recent global banking crisis is not without precedent. Such blow-ups are not unique to the past 40 years, either: anyone who has studied the long-term financial history of the developed world will know that it is peppered with similar events. The recent crisis was certainly the worst I’ve seen but I doubt it will be the last.

Much has been written about what we should do to prevent a recurrence of banking problems in the future and I thought that a year on from the Lehman bankruptcy was a good time to summarise my views. My seven-point plan is as follows:

1. A number of banks have become too big. Sadly, few seem to be prepared to tackle this aspect of the crisis, possibly because the influence of large banks within the establishment is too great. I don’t see why banks need to be as big as some have become, or why their activities need to be as wide-ranging as they are. In particular I think the case for separating commercial and investment banking is a strong one. Unfortunately we seem to be progressing in the opposite direction, with some large US investment institutions becoming universal banks. As soon as banks become global, we run the risk of worldwide rather than regional crises. Regulation is still carried out on a regional or, in most cases, national basis. This mismatch of activities and regulation exposes the system to significant risks.

2. As the finance director of one of the banks that has come out of the crisis largely unscathed argued in a recent meeting, it is trading and treasury functions and not commercial lending that got the industry into trouble. The case for increased regulation of trading and treasury functions is strong and banks should be required to carry significantly more regulatory capital for these activities.

3. Wholesale funding can be more risky than deposit funding as it tends to be less sticky, particularly when there is a loss of confidence. I think there is a case for encouraging the development of more, longer-term wholesale funding to complement customer deposits.

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