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Banking: a matter of Morals

Reform of the banking sector is a moral issue and one with which people of faith should engage

With stock markets reaching new highs and some banks recruiting again there is the distinct impression that things are going back to "business as usual". In some respects, this should be welcomed, though not in the case of new excessive bonuses. We need a resurgence of confidence in the economy to help take us out of recession.

Nevertheless, we cannot pretend that the events in the banking sector over the past couple of years never happened. The financial crisis cost jobs and increased poverty, particularly amongst the already very poor. Governments have had to intervene to prevent economic depression, which has meant large public sector deficits which at some point must be reduced. We need to reform the banking sector to prevent or at least mitigate the effects of another financial crisis. That is why the Christian Socialist Movement has supported an early day motion (EDM) yesterday urging government to separate "casino" banks from retail banks. The EDM was tabled by CSM chair Alun Michael and supported by John McFall, Treasury committee chair.

While the roots of this particular financial crisis lay in the US sub-prime mortgage market, the crisis was systemic because banks did not properly control their exposure to the esoteric securities which had been invented. This was not just a problem for investment banks such as Lehman Brothers. More traditional retail banks had also exposed themselves to these risks. Their inability to determine the nature or size of their exposure meant that retail and business banking was threatened and even the ability to make simple payments was thrown into doubt.

When Lehman Brothers collapsed, it was clear that it was intertwined via toxic assets with the retail banks, some of which held securities a world away from their business expertise. Bold action by the government in the UK and elsewhere effectively prevented the financial system from completely collapsing, but it could not prevent the enormous drop in confidence around the world (though it did mitigate the effect). The impact this has had on people, especially the poor, is one reason why the banking crisis has moral implications.

There is international consensus for stronger regulation and the pressure for this to happen must not cease. Regulation must be wiser and must have a long term, shrewd, approach to banking. Ultimately, I agree with the US economist JK Galbraith, who noted that most financial innovation comes down to more ways to increase leverage. Effective regulation needs to control the amount of borrowing undertaken by banks and must ensure transparency.


Yet stronger regulation will not be sufficient, even though it is necessary. Memories of financial disasters fade over time and people repeat old mistakes. Periods of stability create the conditions for complacency and the taking of more risks, as economist Hyman Minsky pointed out. So-called living wills for banks may not work if worried retail depositors feel they do not want to wait to see if the wills are effective.

Separating "casino" banking from retail banking would help increase transparency and prevent the next banking crisis from threatening to take down the whole system. Retail deposits would continue to be protected and moral hazard reduced in the investment banking sector. Investment banks which made mistakes could go bust without generating systemic risks or risking people's savings. The cost of certain speculative financial instruments for businesses might be higher because there would no longer be the guarantee of a taxpayer bailout of the bank if things went wrong, but the cost increase would simply mean risk was being correctly priced. The City of London would retain or even enhance its reputation as a leading financial centre.

Banks left behind a proper sense of ethics and the common good, which some are now recovering and others seem yet to learn. Reform of the banking sector to make it better in every sense is a moral issue and one with which people of faith should engage. By supporting this early day motion and highlighting the issue CSM is hoping to promote just such an engagement. More than that, it is important to remember that arguments about banking reform are not just technical; people's lives and livelihoods depend on the outcome.


First published on Guardian Comment is Free 14 October 2009.

Guardian Comment is Free, 14th October 2009, 14/10/2009

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