21st September 2012
The economist John Kay outlines the problem in yesterday's Financial Times: "Effective reform should aim at structures, not at intensified supervision. Resilient systems are simple ones. The most effective supervisors of financial institutions are not bureaucrats but other financial institutions. These principles should be fundamental to a new approach and they have wide implications."
He goes on to call for ‘smaller, simpler financial institutions', whose failure would not pose a systemic risk to the global financial system.
Policymakers have talked a good game about ‘too big to fail' banks and what needs to be done, but as yet, there is no tangible policy in place to address the problem. Banking regulation has, as Kay says, focused on capital ratios and supervision.
Also, arguably, quantitative easing has had the opposite effect. The Naked Capitalism blog argues that: (the US central bank) is deliberately boosting bank profits, perhaps also hoping that the banks will eventually feel robust enough to do more lending. The wee problem is that financial speculation is so much more profitable and much easier to dial up and down quickly."