The questions that are in the minds of people who follow business events are; why is the President of one of the most capitalist countries in the world taking such action on banking regulation? And is he right in introducing these new banking regulations?
One commentator argued that President Obama is “launching a historic campaign to remake Wall Street that threatens to throw the banking industry into turmoil” but if this action is what’s necessary to reform banks then so be it.
The proposed changes would lead to restraint in the size of banks as they will now be forced to choose between commercial banking and proprietary trading. However rigorous or punitive these measures may seem to look to some people they are very necessary to the existence of a more secure financial sector.
The global economy is still recovering from the consequences of an economic disaster caused by banks but despite this fact, the banking industry does not appear to have changed. Since the financial industry does not want to learn its lessons and re-invent itself, then someone must change it.
The industry is too big too fail and according to the President “Never again will the American taxpayer be held hostage by a bank that is too big to fail.” Due to the enormous size of the financial industry it puts the global economy at ransom because the industry players are aware that they will not be allowed to fail as they will be bailed out again like what happened in 2008 and 2009. By restricting their size it means in the event of future crises some of the banks will be allowed to fail without causing contagion into the financial system because only a small cog would have been removed from the wheel.
The Chief Reasons Why The Financial Sector Must Be Changed:
If things continue as if nothing has happened the financial industry players will continue to enjoy the upside of their activities. The profits in a bank are privatised however the losses and risks are socialised as was the case just before the credit crunch. The other related issue is that the financial industry is being insured by the taxpayers but they pay nothing for the insurance as the industry owes its existence to the money pumped into the financial system by governments and central banks. This is probably the only insurance in the world that costs nothing to the party being insured.
Currently some players are using depositors’ funds in conducting some of their trading or casino activities. By segregating commercial banking from proprietary trading it means the funding for some of the high risk trading will dry up as these will no longer be funded by depositors’ money. The returns on proprietary trading are high because of an artificial arbitrage in the funding arrangements that finance the trades. Elimination of this arbitrage means that in future proprietary traders will be paying the correct price of money as they will need to borrow it from a bank.
Like all high risk borrowers the proprietary traders will be paying high rates of interest on their loans because they operate in a high risk environment. They may also be required to hold their own capital base which will act as collateral and this is a better system when compared to the current situation, where banks use depositors’ money for trading.
Conclusion
The President and his economic team have got this one spot on and the only hope is they will be consistent in bringing more regulation in future like this one without fear or favour of any industry player. The great hope is that the world will follow and support the United States of America on this banking regulation.
Munya Mtetwa - Munya is an ACCA and IFA qualified accountant with over ten years financial management and accounting experience acquired in a plethora of ...
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