Banking reform – time to stop privatising the profits and socialising the losses

FOR the past four months I have been serving on the Parliamentary Commission on Banking Standards. It was set up in July in response to the Libor and other scandals and at first tasked with looking at culture and behaviour. However in recent weeks it has concentrated more on the issue of structure – whether investment banking and retail banking should be split. Sir John Vickers reported on this question last year arguing that there should be a ring fence placed around retail banking, but against a full split. The Commission has been asked to do the job of pre-legislative scrutiny of the Bill to implement the Vickers Report.


Amid this focus on the structure of banking, there is a danger that another question gets overlooked – who should bear the losses in the event of another banking crisis? One of the things that most angered the public about the recent crisis was that when times were good, the profits were private (and huge) but that when the crisis came, the losses (also huge) were borne not by those who had lent money to the banks but by taxpayers.


All across Europe, austerity measures have been imposed on electorates to pay for the cost of bailing out banks. And the banks were bailed out because the social and economic cost of allowing them to collapse was deemed too great. Yet, apart from some exceptions in Greece, for the most part the bondholders who lent to the banks have not had to take haircuts on their investments. They have been paid while the taxpayer swallows job losses, pension cuts and cuts to services. No wonder people are angry. Read More…