How much regulation does the City need?


           Regulation is like the 3 bears porridge. If you have none, the world is worried about your businesses and the safety of their money if placed with you. If you have too much it is too costly and difficult for businesses and customers  alike, so the work goes elsewhere. You need the Goldilocks amount, not too much and not too little.

        As you need to ration your regulatory interventions, you should establish the priorities you need to achieve with effective regulation. There are two overriding requirements when regulating businesses that can take your money on a promise of giving it back sometime.

           The first is the regulator needs to ensure your money when invested with a bank or other institution remains your money, held to your account or available when you need it. You must be able to get it back at the stated  times in the contract. That is why we have bank solvency and liquidity requirements, and custodian and Trustee arrangements for funds.

           The second is the regulator needs to ensure that the institution does with the money what they say they will do with the money. If the financial institution has said it is running a fund which bets on the horses, it needs to show how it is has placed bets on the horses and what happened to its bets. If it says it is keeping your money safe in deposits it should do so and be able to show you where and how it has done so.

           The regulators these days try to go much further than that. They are interested in ensuring advisers offer correct advice. The problem with this approach is no-one knows in advance what is correct advice. Today’s risky asset can be tomorrow’s investment success. Today’s safe asset may collapse tomorrow. The Regulator could end up entrenching the errors of the day into many people’s portfolios or savings. Regulators would urge people not to buy the betting on the horses funds, but to stick with the bank deposit fund. That would protect their money in normal circumstances. If , however, the fund had placed lots of its money in Icelandic deposits in 2008, whilst the horse betting fund had a winning streak, the results could confound the normal predictions.

          Investment today poses serious problems for regulators and investors. Are gilts still a safe haven investment, the possible core of a cautious portfolio? Or are the small yields now a warning sign of another bubble, which will one day burst and lose holders a lot of money? Is gold a great idea, with more years of bull market ahead of it as people get more disenchanted with paper currencies and as Asian demand stimulates the party? Or is gold a barborous relic, now sitting at a high price, which could itself tumble?  Have European bank shares discounted the obvious discomforts of life in the Eurozone, or have they further to fall as the crisis unfolds?

         The clash of opinions on these and other investment matters are what makes a market. If the Regulators spend too much time worrying about wrong selling, and risk measurement, they run the risk of missing the big issues over solvency, liquidity and transparency which should be fundamental to  regulating honest and sucessful markets. Many investors accept caveat emptor when they themselves choose which funds or assets to buy. What they cannot accept is the failure of a bank to return a deposit when due, the collapse of an investment fund because it has done things it did not say it would do, or the theft of money from an investment by a crooked manager. Those are the big things the Regulators need to target.


  1. Tony
    July 11, 2012

    With regards to #2 and #3, what have these got to do wth financial services?

    If you buy a car shouldn’t you expect the brakes to work? If you buy a bottle of milk shouldn’t you expect that it isn’t polluted with unexpected toxins?

    If you book a holiday shouldn’t you expect that the funds aren’t stolen by a crooked agend?

    I think #2 and #3 are jobs for the police, not regulators, and for all industries, not just finance! Regulators actually get in the way by making it less clear who has responsibility for dealing with the crime, and by creating rulebooks that crooks can point to and say “I was following the rules!”.

    Sure regulators are like Goldilocks, if you think they can magically prevent this stuff then by all means believe in fairy stories.

    #1 should be the job of the BoE, since they are the entity that will ultimately supply liquidity to the bank to give you the deposit if the bank runs into trouble. Whether you think the current architecture of the banking system makes sense or not is another question entirely.

    1. Single Acts
      July 11, 2012

      Agreed with the first part. I fancy regulators are counterproductive because it suggests that is something is regulated the need to think for yourself is removed.

      I have to say that no central bank should supply liquidity however. Let banks stand or fail on their own and thus no crazy-large bailouts and anyway, artificial credit creation is absolutely counterproductive to recovery since it stops the liquidation of bust assets and it stores the seeds of the next crash with inflation and malinvestment. Von Mises pointed this out 100 years ago and time has vindicated him.

      1. lifelogic
        July 12, 2012

        Regulation need to be intelligent. It need to set a framework so that the companies know what is illegal, what information they have to convey to clients, what the acceptable accounting rules are and how they are expected to deal with risks and show them in the accounts. Things like changing account, carrying mobile phone numbers with you, not being charged ten times the rate to ring home from abroad or on £20 for a short call on a ferry when you did not realise you would be it. Otherwise companies will push and push at the limits of legal acceptability.

        You cannot avoid some regulation, it just needs to be intelligent and efficient and look after consumers, the government has failed on all counts as usual.

        1. Bob
          July 16, 2012


          “…government has failed on all counts as usual.”

          What else would you expect from people who have no real world experience outside of academia and politics?

  2. Denis Cooper
    July 11, 2012

    It was a family story that one of my uncles made his living by betting on horses, so if he’d been running a horse betting fund the investors may have done OK.

    It’s actually a problem that an investment fund may build up a very good reputation while being run by a particularly talented manager, and then it declines once he’s left.

  3. Robert K
    July 11, 2012

    The crash and current economic crisis happened in an era of the strictest banking regulation in history, so in my view the less banking regulation the better.
    Banks and their customers should be told that the taxpayer will not step in to bail them out if a bank goes bust. If I deposit money with a bank and accept a payment of interest in return then I have accepted a degree of risk. The higher the rate of interest, the higher the likely risk. For example, the Icelandic banks were offering exceptionally high interest rates to depositors in 2007 before collapsing shortly afterwards. None of those depositors should have been bailed out by the taxpayer.
    If I want a bank to hold my cash deposits on a risk-free and fungible basis (i.e. allowing me to deposit cash in one branch and remove the same amount from a different branch) then I need to pay the bank a fee. If I want to minimise the risk to my deposit, I make sure I choose a bank that has ring-fenced my deposits. If I choose one that, for example, does not charge me for the cost of running my current account, then I accept the risk that it will be taking my deposits and using them to make a profit.

    1. Alan Wheatley
      July 11, 2012

      If the bank goes bust where would you put the depositors in the pecking order of creditors?

      1. Robert K
        July 12, 2012

        That would be decided by the bank. Typically, the order of priority when a firm goes insolvent is: the taxman; secured creditors; unsecured creditors and finally shareholders. The taxman is unlikely to concede his position at the head of the queue. If I was running a bank, I would put depositors ahead of secured creditors in the pecking order. I would also create a ring-fenced part of my bank where depositors who were paying for cash services (the fungible bit in my post) would be protected even if the bank became insolvent. Other banks might think differently and this would determine the type of customers they attract.
        If I was a customer, I would check to see what arrangements my bank had made to protect my deposits – if it offered me a lesser status amongst creditors then I would expect a higher rate of return on my deposits and vice versa.
        It’s all about pricing risk.

  4. Alte Fritz
    July 11, 2012

    Absolutely. The interventionist approach has infantilised investors. Many have an expectation that the IFA will take them safely through the minefield to achieve returns which defy gravity. There were and always be abuses to watch out for when salesmen seek to part people from their money by selling the impossible or telling lies. Let regulators concentrate on the fundamentals.

    Tony may have a point because some misselling is “criminal”.

  5. Brenda Lee
    July 11, 2012

    I appreciate what John is saying, but I think it’s a bit after the horse has bolted. Even if we’re seen to be fair and regulatory on the banks, the average normal voter (not talking traditionally rabid socialist Manchester/Mersey Glasgow etc) sees that the bankers are in reality controlling politicians now.

  6. Martin C
    July 11, 2012

    What about the theft of money from an investment by a greedy government?

    1. Mark
      July 11, 2012

      Brown legislated to make that compulsory for pensions in a variety of ways: dividend taxation, taxation of temporarily overfunded schemes that had had investment success, forced investment in gilts for “safety”. The latter means you have to live to 100 just to get the real value of the capital your pension accumulated repaid.

    2. Alan Wheatley
      July 11, 2012

      Indeed! For instance, Gordon Brown changed the rules on pensions, and it that case the investor did not have the ability of moving funds to a different investment.

  7. lifelogic
    July 11, 2012

    Good regulation is hard to achieve but is clearly needed. In financial services we have seen Equitable life, collapsed banks, duff insurance policies, mortgage endowments and loan protection insurance and countless other things. In investments we have high charges made to often as not help you loose money more quickly. Fees that are hidden and churning for commissions. Also director taking huge fees while trashing the values of their companies.

    These were all clearly rackets in so many cases. Do not separate individuals from their money by tax incentives (isas and pensions) and get some proper control over fee transparency, accounting rules and standard policies for some insurance, and investments so people can actually compare like with like.

    Criminal sanctions need to be stronger in many cases. Bank and insurance companies need a risk regulator to ensure they are solid and stop them taking on too much risk for their base capital.

    1. forthurst
      July 11, 2012

      Equitable Life was destroyed by the judiciary. There was nothing in the Lords Judgement which suggested that any of the judges had the faintest idea of the issues or the consequences for Equitable Life and most of the investors if they brought forward the judgement they did. Had they felt it incumbent to bring in such a judgement in terms of the law as they saw it they should have recommended to parliament an immediate change to rectify the matter. However, the issue was quite clear: each investor in a With Profits fund has his own clearly defined pot which is entirely separate from everybody else’s and which is increased with each premium and by each reversionary bonus (rate of interest). Those holding to maturity qualify for a terminal bonus dependent on the term and the availability of unallocated profits in the fund.
      In the case concerned, one class of investors who had invested in a With Profits product which had a higher guaranteed reversionary bonus as against another class in another product with a lower guaranteed reversionary bonus were allocated a terminal bonus by the judiciary equivalent to those whose allocations in the With Profits Fund over the terms of their policies had been substantially lower; in other words they were allocated profits from the fund which did not exist as free assets. A With Profits Fund is simply an adminstrative convenience for investment purposes and should not entitle an investor beyond the guaranteed reversionary bonuses and the discretion of the acturies running it to allocate free assets fairly to all investors.

      1. lifelogic
        July 11, 2012

        It was actually destroyed by Equitable taking investments in one fund on a different basis from some investors (with a guaranteed annuity) and others who did not have this guarantee. This was clearly absurd and bound to cause a huge conflict of interests between the two. The regulator should have intervened straight away when this was done to prevent it.

        I agree that the judiciary should perhaps have been more pragmatic and this might have served the investors rather better. So much of the money has been wasted on Lawyers and the like as a result.

        1. lifelogic
          July 11, 2012

          Again a lesson in not separating people from their investments by complex tax breaks and convoluted structures.

        2. forthurst
          July 11, 2012

          Having checked the wiki article I agree that I have slightly misrepresented the two classes of policyholder. However, I do not agree that the judiciary had any right to retrospectively remove the widely understood discretion of actuaries allocating bonuses to policyholders in WP funds particularly of a mutual society (which had adverse repercussions throughout the industry) and their failure to consider the financial implications of their judgement was entirely reprehensible. From the wiki article, “It must be said that this judgment is still somewhat controversial in legal circles as Sir John Chadwick (a retired Court of Appeal Judge) said in 2010 “The view is widely held among lawyers experienced in this field that the House of Lords’ decision in Hyman was unexpected and did not accord with the principles that should have been applicable in relation to a mutual Society”.”

      2. A different Simon
        July 11, 2012

        Forthhurst ,

        It’s just like the doomed NEST pension scheme which John says is going ahead in October .

        The people devising them , regulating them and ensuring they follow the law do not actually use them themselves . The only people with skin in them are little people .

        This explains why the judges didn’t understand it – they have no reason to . Best for their careers to go along with the status quo too .

        Until Judges , MP’s and regulators and public sector workers have to take their chances with the rest of us there will never be access to decent schemes for the masses .

      3. alan jutson
        July 11, 2012


        The problem was not just the judgement.

        Equitable Life panicked after that judgement was made, and attempted too bigger correction, in too faster time.

        The simple solution to get out of it, would have been to award lower bonuses, or no bonuses at all to be allocated to any policy, until things slowly improved.

        The fact (I believe) that the Chief Actuary was also the Chairman at the same time, and held too much power, and was thus perhaps too dominant, did not help.

        The FSA failed with this Company as they have failed with many others since.

        The actual Regulation may have been ok, but the Regulator who is supposed to enforce those Regulations, was simply not up to the job.

        Thus a Government department has failed to control the industry properly.

        If you are going to have rules, you have to have someone who is capable and unafraid of enforcing them, no matter how large the organisation you are regulating.

      4. Lola
        July 11, 2012

        EL was destroyed by a combination of management hubris and, well, lies. Stupid tick box regulation. Possibly bizarre judicial decisions.

  8. Lord Blagger
    July 11, 2012

    If you have too much it is too costly and difficult for businesses and customers alike, so the work goes elsewhere


    Not quite.

    In the middle there is another scenario. Regulation will kill off new start ups. For established businesses who amortise the cost of regulation over lots of customers and pass on the cost, its a great thing. You don’t have to be competitive and you can soak your customers.

    The same applies when the government doesn’t bankrupt failed banks. They have to gouge their customers. All you have to do is just undercut their prices and you profit even more than you would in a competitive environment.

    Another example is the channel tunnel. The ferry operators don’t want the tunnel to go bust, re-emerge free of debts, because they would be undercut and wiped out.

    The same applies to government. People like John can’t give you the choice say over your state pension. If you could put the money (NI) into a fund you would be better off in retirement even if you were on min wage. (based on past performance). They have to take the money from you even though they know they won’t pay it out (according to the treasury plan). That’s the action of fraudsters.

  9. oldtimer
    July 11, 2012

    Your comment, in your concluding paragraph “…, or the theft of money from an investment by a crooked manager. ” reminded me of the sudden imposition of the pensions tax by a certain Mr Brown. This has decimated and destroyed the retirement pensions of millions of people. I believe it is estimated to amount to in excess of £100 billion so far – and still counting. It has forced the closure of thousands of pension schemes.

    1. alan jutson
      July 11, 2012


      Yes that sum you mention, stolen from pensioners would more than pay many times over, for free care for everyone if and when needed.

      Just about sums up the scale of the robbery and the futile arguments about the cost of care now being debated.

      And they say we are a democratic, developed economy, and Country.

      1. Bob
        July 16, 2012

        And they say we are a democratic, developed economy, and Country.

        A apt comment I saw on another blog recently:
        “Democracy, translated as ‘people rule’, can easily lead to two wolves and a sheep having a vote on what to eat for lunch.
        John Wrexham”

  10. Lindsay McDougall
    July 11, 2012

    If regulators were any good at picking winners, they would be in business on their own account, would they not? We don’t want the blind leading the sighted, do we?

    Were interest rate swaps missold for the most part? It is HM government and the Bank of England who have kept interest rates artificially low for years, not the banks.

    1. Mark
      July 11, 2012

      The banks take advantage of every opportunity for profit to rebuild their capital – especially those sanctioned and aided by the state.

      1. Lindsay McDougall
        July 12, 2012

        Yes, and so they should. We don’t want weak banks dominated by the state.

      2. Bob
        July 16, 2012


        Not just banks.
        Insurers too.

        I was told by a broker that there is some kind of quango which post credit crunch has organised the underwriters into a form of legalised cartel in order to help rebuild their reserves.

    2. lifelogic
      July 12, 2012

      It is not their job to pick winners, just ensure a level playing field and no cheating or undue risk taking using others money.

  11. forthurst
    July 11, 2012

    There is tension between savers and investors who wish to put their money to work to build businesses and the economy in return for a higher return later and predators (banksters) who are very keen to expropriate those investments for their own enrichment (bonuses) .
    This tension should be resolved overwhelmingly by the law to favour investors and penalise predators. The stock market is purportedly for investors to assist businesses grow, so why is 80% of turnover conducted by computers? There is clear evidence that significant activity in the stock market and many other markets is undertaken in order to move (or falsify) the (clearing) prices rather than respond to genuine supply and demand. Huge additional costs have been created for genuine users of some markets as a result.

    It is not so much an issue of regulation but of lawful activity and the policing thereof. Bank should not be able to hold other than tradeable assets valued at market price in their balance sheets and should not be able to create ‘special vehicles’ to offshore them to the Caymans.

  12. Leslie Singleton
    July 11, 2012

    I notice that you do not mention the auditors. Although there are issues with them too it is they and perhaps the Fraud Squad, not the alphabet soup of the letter-writing FSA, that are most likely to pick up on wrongdoing. If I am right, there was no such thing as “regulators” in the financial world till recently yet somehow we managed.

  13. Richard1
    July 11, 2012

    This is very well put. A key point about regulation is the more rules and regulation there are the more inured managements are from the discipline of the market. Bank capital rules are an example – set a minimum Tier 1 ratio and it becomes a target. Customers and taxpayers will be protected and the market will function as an efficient price discovery mechanism only if there is proper enforcement of contracts (eg as you mention investment managers doing what they say they will, banks paying deposits back), and if institutions are able to fail. Only in this way will customers, shareholders and boards impose the discipline, culture and controls that enable a proper market. A rule book, however long, will never get there. This is the point completely missed by people like Mssrs Balls and Milliband.

  14. A different Simon
    July 11, 2012

    Regulation has it’s place but ultimately it is about reputations and perception .

    In the UK there is no will to bring financial wrong doing to account .

    May as well go the whole hog and decriminalise false accounting as Italy have done .

    Why did it take the Yanks to publicise the collusion in the fixing of Libor rates ?

    The City of London has earned itself the unsavoury reputation as the world capital of curruption and money laundering . Undisputed .

    Criminals flock to London because institutions and authorities in the US , Canada , Australia and Germany would not touch them with a barge pole because they recognise the true value of their own reputation .

    Unfortunately that is the end of the market the UK is aiming for these days .
    It’s not that far off Putin and organised crime now . etc etc

    Reply London is a highly regulated set of markets where government does wish to prevent crime

  15. sm
    July 11, 2012

    A lot less if they were properly split up (Glass Steagall style) and allowed to lose their own money.Preferably i mean equity or real money not privately created interest debt bearing money.

    A lot less if we have moral hazard and a level field of fair competition and capitalism which keeps them to a manageable size, i.e. able to fail safely for us.

    Mitigate the power of vested interest in the democratic process, this protects the guards from regulatory capture and neutering by limiting political donations to individuals, who are fully resident, domiciled and who are certified tax compliant by HMRC.

    Reconsider the merits of full reserve banking, but always ensure the benefits of money creation flow directly to the state not private concerns.

    Ensure the guards like the BOE own monetary interests are aligned with the private taxpayer investor interest so even if they become captured they suffer the same fate as mere non-public, non inflation protected mortals.

    Any finance institution in receipt of state aid or liquidity support, should then be subject to 1) pay & pension caps to protect the taxpayer. 2) distribution suspensions 3) Capital raising by bail-in bonds etc 4) A full and unhindered audit of all its tax planning activities both on and offshore.

    Oh why not review the back episodes of the Keiser Report and many others. Google ‘the 25 most dangerous people in financial media.’

  16. Winston Smith
    July 11, 2012

    I find the Libor story very interesting. Maybe, because I smell a rat when I read establishment commentators and journalists so quickly and vehemently deny that there was any Govt/BofE conspiracy to reduce Libor during the crisis. Barclays appear to have been initially the rogue bank not following the elite’s strategy. See below. Perhaps, that is why they are now being attacked by the political/media elite. Is it healthy for democracy and free markets, when the Governor of the State bank forces out the top man in one of our leading private banks? Why are politicians failing to hold to account the Governor for his actions and clear failings? What are you afraid of?

    1. Lindsay McDougall
      July 12, 2012

      Let me put a theory to you. When the Labour government, through the Bank of England, expressed the view that Barclays were borrowing at too high a rate, it was allegedly because they were concerned that Barclays might be having difficulty getting funding. Could it be that they positively wanted Barclays to come cap in hand to the government the way that RBS and HBOS had done? Remember that Brown and Balls are socialists and nothing would have suited them better than the effective nationalisation of the banking sector. Just image the power they would have had – all of the taxation revenue and most of the available funding capital. Luckily for us, John Varley, then the CEO of Barclays, resisted the call from No 10 and got funding from the Arabs instead – much more straightforward. etc

  17. Ralph Musgrave
    July 11, 2012

    There are a two or three very simple rules that would solve all the problems JR refers to and which are in line with Robert K’s points above. These rules have been set out by Prof. Lawrence Kotlikoff and Prof.Richard Werner. (Their ideas are very similar). Re Werner, see:

    The rules are thus. Depositors MUST choose between accounts where their money is 100% safe, and in contrast, accounts where their money is loaned on or invested by their bank. Money in the former is (i) taxpayer guaranteed, (ii) is instant access, (iii) is probably just lodged at the central bank where it will earn little or no interest.

    As to the latter accounts – “investment” accounts – the money is (i) not instant access, (ii) not taxpayer guaranteed.

    Those rules AUTOMATICALLY INCORPORATE the Glass-Steagall high street / investment banking split.

    The rules also get round the current absurdity of depositors acting in a COMMERCIAL manner (letting their bank lend their money on in a less than 100% safe manner) while expecting to be absolved of the risk normally associated with commerce: losing some or all one’s money.

    JR rather implies that even Gilts are not safe enough for 100% safe accounts: I agree – because Gilts rise and fall in value. I.e. the relevant money should be invested in NOTHING: or perhaps just be lodged at the central bank.

    The reason Vickers & Co didn’t go for the above beautifully simple solution is that their grasp of macroeconomics was woeful. They argued that the above sort of “narrow banking” rules would restrict bank lending and thus thwart economic growth. Well obviously narrow banking WILL HAVE that effect ALL ELSE EQUAL.

    But all else does not need to be equal. That is, the government / central bank machine can perfectly well expand the TOTAL money supply to make good for the conservative way in which money is used under narrow banking. Money is just numbers in computers: the money supply can be expanded any time.

    1. Lindsay McDougall
      July 12, 2012

      You do realise that if retail banking were to be totally separated from risk, the returns would be so piddling that ‘free banking’ would have to come to an end. The banks would not be able to afford it and regular bank charges would return.

      1. Robert K
        July 12, 2012

        There is no such thing as free banking. If a bank offers a current account that provides facilities such as cash deposits, ATM withdrawals, standing orders and so on, and does not charge me, then it will go bust. In fact, the bank takes the money that I have loaned it and puts it at risk to get a return. In other words in a “free” bank account the charges come in the form of risk, not cash.

  18. Mark
    July 11, 2012

    Regulators need to know and understand what is happening in the markets they regulate. The only real way of doing that is by being involved directly, not sitting in a regulatory ivory tower. They need to be able to put a stop to bad practice that may not have explicit legislation prohibiting it. Principles based regulation is far superior to rules based regulation. They need to be alive to problems that arise through smaller firms acting the same way, every bit as much as problems with large firms.

    We also need to educate the public about a) the benefits of honesty and fair dealing, b) some rather better understanding of financial products and pricing mechanisms or contract terms for other products and services, and c) that complex products should be regarded with suspicion.

    Few consumers manage to evaluate the most cost effective mobile telephone tariff for their needs, or begin to make sense of energy tariffs. Rather less than 1% I suspect would be able to understand the basis for choosing between fixed and floating rate interest deals, let alone arbitrage them.

    1. Lola
      July 11, 2012

      ‘Principles’ based regulaiton won’t work either. Whose principles? I am an IFA and my ‘principles’ and those I provide for clients are a lot different to the ‘principles’ of the bureaucrats at the failed FSA. Mine are not ‘wrong’, they are different and they suit my clients.

      The fact is that the best regulaiton is self regulation by ones peers. I do not want bad IFA’s running about, and I can do something about that through my trade and professional bodies. It does not need state regulation at all. As neither do banks – as long as there is proper reform of the Banking Acts which have totally confused the issue.

      1. Robert K
        July 12, 2012

        Spot on. How can it be possible for a regulator to be “involved directly, not sitting in a regulatory ivory tower”? The whole point about an external regulator is that it is not involved directly in the market. By far the best form of regulation is allowing customers of products and services to decide what suits them best.

      2. uanime5
        July 12, 2012

        The fact is that the best regulaiton is self regulation by ones peers.
        Somehow I feel that having bankers regulate bankers won’t work.

      3. Mark
        July 12, 2012

        How do you decide in self regulation? I know I did it by applying principles of fair dealing, not a detailed rule book. But yes, in case you didn’t notice, I pointed out that regulators have to be involved in the sectors they regulate. At the same time, you can’t have a babel of regulators: there has to be a clear recognition of a source of authority to decide issues.

        I disagree that customers are a reliable way to regulate. They are often ill-educated (see my examples), and economically impotent in the face of oligopolies and monopolies. Customer regulation only works when customers are not at an information or economic disadvantage.

  19. uanime5
    July 11, 2012

    Given how many people on this blog said the bankers weren’t to blame because the Government didn’t regulate them properly it seems that too much regulation is preferable to too little.

    1. Lindsay McDougall
      July 12, 2012

      The big mistake was – and is – not letting failed banks fail. It should have been applied in the UK, in Ireland and in Greece and it should now be applied in Spain, Italy and France. If you say (and you have to mean it) that there will be no bail outs using taxpayers’ money in any circumstances, then the shareholders will get a lot more active and will determine the extent of a bank’s risk taking. With such a system in place, you would hardly need any regulation at all.

      You should look at Iceland’s experience. In 2008, their banks’ debts totalled 10 times GDP, so the Icelandic government had no option but to say that the banks were private institutions and had to go bust. After the defaults, Iceland’s GDP contractaed by 16% but is now increasing again. The worst is past.

      Often, bail outs are to prevent defaults. As such, they are designed to protect the interest of creditors and not necessarily that of borrowers.

      1. uanime5
        July 12, 2012

        1) If the banks weren’t bailed out it would be depositors, not shareholders, who would suffer the most.

        2) Iceland guaranteed the deposits of their citizens but refused to pay them for anyone else.

        3) Iceland was later forced by the courts to pay back the Netherlands and the UK the amount of money the banks owed them.

        4) Their debt went from 28% of GDP to 130% of GDP.

        5) Currency devaluations have effectively reduced wages by 50%.

        While the worst may be over in Iceland they have not yet recovered.

        1. Lindsay McDougall
          July 13, 2012

          (1) is the crucial point. How so? The theory of pure capitalism – and as I understand it this is the law – is that shareholders have to lose 100% before depositors (who are a particular type of creditor) lose a single penny.

          If a small company starts making losses, it is required to cease trading before it becomes insolvent; indeed, it is an offence to carry on trading if you are knowingly insolvent. If they get it right, creditors get 100% of their dues.

          The crime of the Brown government was that they did not do due diligence on RBS before buying most of their shares. Worse, they more or less forced Lloyds to buy HBOS before Lloyds had time to do due diligence. As a result, the taxpayer payed too high a price for the shares. The correct course of action would have been to send administrators into RBS and HBOS, to determine as best they could just how toxic the toxic assets were (stating the dependence on future property price movements), then to determine who might buy the shares. By not making an immediate offer for the shares, HM government would have been in a position to ensure that shareholders would have suffered first and most, then depositors and other creditors, and last of all taxpayers.

          It is rather important that the EU authorities do not repeat Gordon Brown’s errors regarding Spanish, Italian and French banks.

    2. Robert K
      July 12, 2012

      People like regulation because it makes them feel safe. Well, life ain’t safe.

      1. lifelogic
        July 12, 2012

        No but with no regulation and without honest accounting regulations how can someone perhaps depositing just £5000 be expected to make any sort of judgement on security.

  20. Jon
    July 11, 2012

    Would agree very much with that. We all want some form of regulation but like so many things how has it ended up so vast. We wanted a common market so how did we end up with the monster in Brussells.

    As said they should just look at the main cornerstones of what is important. The people who invested in the Icelandic banks did so because they were paying out such high returns. Yet a simple question of how is it possible to pay 5%+ at that time would have told them all they needed to know. They invested there for greed and the best regulator for that is to be a bit more sensible next time and take the loss rather than trying to find someone else to foot the bill or blame.

    The celebs etc who invested in unregulated schemes that suggested they could just pay 1% tax now want to sue their advisers. I’m not suggesting those advisers may not be dodgy but its a bit like buying smuggled and counterfeit goods because they are cheap and then when its not quite what you thought it was trying to get someone to compensate you.

    There is a point where the more they try to regulate over and above the more the cost of the greedy will be bourne by the ordinary taxpayer one way or another.
    When these people go to court they may pay court costs but it will be heavily subsidised by the taxpayer. The regulator maybe dragged in and have to pay to be represented and defend themselves and that indirectly comes from us.

    I find it odd that when you look at the Equitable Life debacle when the regulator was annually tipped off by the industry that they sat on that information and did nothing. A young administrator in the industry on £15000 a year can face a fine and imprisonment for holding back incriminating information but the regulator can do the same and not abide by their own rules.

    1. Lindsay McDougall
      July 13, 2012

      Precisely. So follow the argument where it leads. If there is NO regulation, there is NO taxpayer liability.

  21. zorro
    July 11, 2012

    The key to effective regulation is that it must be simple, easy to understand/operate, and achieve its aim, something which has eluded the authorities in recent times…….Too much inefficient regulation has been unable to act effectively to prevent ‘fraud’ and catch the miscreants.

    If it is too complex, and difficult to enforce, it will not be respected, and will be easily circumvented. It must be seen to be successful, a deterrent.

    The most effective form of regulation is self regulation based on personal risk – user pays – no bailouts/100% libility.


  22. BobE
    July 11, 2012

    John I am off topic but I wanted to respond to Marks old fasioned diss of my Hydrogen fuel argument. Mark wrote this ……

    “Hydrogen has to be made with considerable energy input. The cheapest method of manufacture is steam reforming of methane, so you might as well use the methane directly instead: Fischer-Tropsch processes for making hydrocarbons from coal as used by SASOL, or synthesis of larger molecule hydrocarbons from methane are more economically attractive. It has a low energy volume density, and is difficult to handle. It is likely to remain a specialist fuel, mainly for things such as space launch rockets.”

    I wish to refrute this with …..
    Mark, the modern way is to convert sea water to hydrogen and oxygen with electricity generated by nuclear power. Endless energy supply. It is the future of transport.

    1. Mark
      July 12, 2012

      Bob, I guess you missed my response:

      Unfortunately that’s much more expensive than steam reforming of methane. It’s usually only used when a high degree of purity is required. There’s a nice table of alternative production technologies and relative cost and efficiency here:

      Using electricity to produce hydrogen is limited by the energy of dissociation of the water molecule and Faraday’s Law. Electrolysis is a factor of at least 3 times as expensive as steam reforming: nuclear energy is not yet available almost for free. Mr Huhne just arranged a large subsidy for nuclear power and measures to prevent it being undercut by coal, despite which at least two nuclear power projects have been cancelled.

    2. lifelogic
      July 12, 2012

      In the medium term surely natural gas from fracking is the answer to heating, electricity and even transport with some nuclear and coal too. Just a shame Cameron, Labour, Libdems and the EU have made people invest in all those pointless windmills and PV bling house roofs covered in moss and bird droppings.

      Rather cold at the moment I notice.

  23. Robbo
    July 12, 2012

    A key point is that there is not a good means to liquidate a bust bank. How many years did it take for BCCI to be sorted out ? Depositors cannot withstand more than a few days of freeze before being able to access, in whole or in part, their deposits. Not that the lack of such a process led to HBOS’s failure also bringing down the otherswise sound Lloyds.

    If we have both a fast clean process to deal with a bust deposit-taking bank and banks of small enough scale that none is ‘too big to fail’, then if heavy depositors spread their risk we shoud be set fair for a while (until everyone forgets this go through, ie c 2032).

    Oh and would the gvt kindly stop making banks buy gilts under the pretence they are risk free – I find Per Kurowski’s analysis – that through wrongly-drawn capital requirements ‘Basel’ regulators have both starved small business of lending and pushed funds into high-risk governemnt lending – compelling.

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