By Steve Baker MP - 29th February 2012
Steve Baker MP sets out a series of mutually-reinforcing measures to resolve the financial crisis and minimise the chance of a future crisis.
A developed society like ours needs a good means of exchange, unit of account and store of value: a good money. It also needs a vibrant, dynamic, reliable and robust means of executing payments and intermediating savings to entrepreneurs: we need a good banking system.
Unfortunately, "Of all the many ways of organising banking, the worst is the one we have today." And I agree with the Governor of the Bank of England’s remarks in his 2010 Bagehot lecture.
The financial system is characterised by territorial monopolies on irredeemable fiat money, central banking, fractional reserve deposit taking, deposit insurance, limited liability and extensive, albeit failed, regulation, such as the use of IFRS accounting. It is this set of institutional factors which enabled the vast credit and business cycle from which the western world is now struggling to recover and which delivered vast private profits with socialised risks.
It isn’t good enough to blame individuals’ behaviour. Greed, irresponsibility and entrepreneurial error are not recent innovations in human nature. The system should have been able to cope.
As I reported yesterday, the Bank of England’s executive director for financial stability, Andy Haldane, published an article in which he wrote:
"The continuing backlash against banking, as evidenced in popular protests on Wall Street and in the City of London, is a response not just to the fact that the world is poorer, as pre-crisis riches have turned to rags, but to the way these riches were privatised, while the rags are being socialised. This disparity is nothing new. Neither, in the main, is it anyone’s fault. For the most part the financial crisis was not the result of individual wickedness or folly. It is not a story of pantomime villains and village idiots. Instead the crisis reflected a failure of the entire system of financial sector governance."
Quite so, but moreover, "The best proposals for reform are those which aim to reshape risk-taking incentives on a durable basis."
In my ten-minute rule motion today, I will seek leave to introduce a bill to improve the governance of banks by adjusting directors’ and employees’ exposure to risk: the Financial Institutions (Reform) Bill.
The purpose of the Bill is to implement a series of mutually-reinforcing measures to resolve the financial crisis and minimise the chance of a future crisis. It is intended to:
• Preserve and extend commercial freedom,
• Promote personal, professional and mutual responsibility,
• Facilitate enterprise under the rule of law, avoiding excessive intervention by regulators,
• Deliver justice, so that those who stand to gain bear the risks of failure.
The fundamental principle is to make bankers liable for their own actions, so reining-in rampant moral hazards and excessive risk-taking. my Bill would:
• Enforce strict liability on directors of financial institutions,
• Enforce unlimited personal liability on directors of financial institutions,
• Require directors of financial institutions to post personal bonds as additional bank capital,
• Require personal bonds and bonuses to be treated as additional bank capital,
• Make provision for the insolvency of financial institutions and
• Establish a financial crimes investigation unit
The idea that directors should have unlimited personal liability for bank losses is an old and historically tested one. For example, the two greatest bankers of the nineteenth century, Nathan Mayer Rothschild (1777-1836) and John Pierpont Morgan (1837-1913), both operated highly successfully under unlimited liability. Unlimited liability meant that they could lose all their personal wealth: this made them conservative in their risk-taking and reassured counterparties who appreciated what they stood to lose if a deal went wrong. It also gave them a strong personal incentive in the long-term survival of their banks and made for a banking system that was much safer and more stable than the contemporary banking system. Unlimited liability remains a good basis on which to take the governance of the financial system forward.
Together, these measures would restore the integrity of the financial system and provide a sound basis on which the UK could continue to lead the world in financial services. Instead of leaving in place a system drenched with moral hazard and then attempting to regulate away the consequences, this set of measures would deal with moral hazard itself, creating a responsible, self-regulating financial system.
Whether or not the House gives leave to introduce the Bill, I look forward to provoking a conversation in line with an increasingly unified message from the Bank of England and which would provide something for which the prime minister has long called: a responsibility revolution.
Steve Baker has been Conservative MP for Wycombe since 2010. He is a co-founder of the Cobden Centre, an educational charity for social progress through honest money, free trade and peace
On Monday March 12, PoliticsHome and The House Magazine hold an event on Responsible Capitalism. #ResponsibleCapitalism
Conservative MP Nadhim Zahawi will host the event entitled 'Excessive Executive Pay: Are those at the top paid too much, or will paying peanuts get monkeys?' http://bit.ly/z3Fpm0