President Barrack Obama has just announced sweeping banking reforms in the US.
Firstly, he wants banks to stop betting on the markets with their own funds. This is what’s known as ‘proprietary’ or ‘prop’ trading.
Secondly, he wants to prevent banks from growing ‘too big to fail’ by limiting the pace of consolidation in the sector.
As a banker who resigned voluntarily in 2001 because I hated the bonus culture that had grown up (which I knew was the precursor to the next recession), I want to register my strong support for these reforms. I hope they will be adopted globally.
In fact I have been advocating a similar policy – that of splitting the investment banks away from clearing banks as soon as possible. It seemed crazy to me that investment banks could gamble and take high risks knowing that they had the safety cushion of the clearing bank capital. This is why the government could not afford to allow banks to collapse.
If the investment banks are standing alone, they will pay for their incompetance with bankruptcy and this is where most of them deserve to be after the 2008 banking crisis. Instead, tax payers have been forced to bail them out at enormous expense.
My only regret is that Britain did not take the lead in announcing these reforms. However, I was not too surprised as the incompetance of our current government seems to know no bounds.
See my article on ‘Weapons Of Mass Destruction‘ , where I outline the dangers posed by our investment banks.
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