The 2008 crash: Reregulation.

Reform selections, assets, regulation, resolution, restructuring, further reading.
Clippings from the internet and print media, 2008 to 2017.

Reform selections.

1. George Soros, Financial Times, 15 December 2009.
Do not ignore the need for financial reform.

. . . I contend that financial markets always present a distorted picture of reality. . . The crash of 2008 was caused by the collapse of a super-bubble that has been growing since 1980. . . I believe that my analysis of the super-bubble offers clues to the reform that is needed.

. . . First . . . financial authorities must accept responsibility for preventing bubbles from growing too big.

. . . Second, to control asset bubbles it is not enough to control the money supply; you must also control credit. The best known means to do so are margin requirements and minimum capital requirements. Currently they are fixed irrespective of the market’s mood because markets are not supposed to have moods. They do, and authorities need to counteract them . . . They must also vary the loan-to-value ratio on commercial and residential mortgages to forestall real-estate bubbles.

. . . Third, since markets are unstable, . . . the positions of all major participants, including hedge funds and sovereign wealth funds, must be monitored to detect imbalances. Certain derivatives, like credit default swaps . . . must be regulated, restricted or forbidden.

. . . Fourth . . . Financial authorities have extended an implicit guarantee to all institutions that are too big to fail. . . Such institutions must use less leverage and accept restrictions on how they invest depositors’ money. Proprietary trading ought to be financed out of banks’ own capital not deposits.

. . . It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall act of 1933 did. But there have to be internal compartments that separate proprietary trading from commercial banking and seal off trading in various markets . . .

Finally, the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans . . . This was an important factor aggravating the crisis.

All these will cut the profitability and leverage of banks.

2. Don’t Be Narrow-Minded. March 29, 2010.

If you were to enforce narrow banking, you would be denying the economy one of the main ways we manage to reconcile the need to be ready for short-term contingencies with the payoff to making long-term commitments.

. . . depository institutions aren’t where the problem is . . . if depository institutions were forced to be narrow banks, even more funds would migrate to shadow banks.

. . . Government backing — the 21st-century version of deposit insurance — plus regulation so that the backed institutions don’t abuse the privilege is still the way to go.

3. The Second Bagehot Lecture. Mervyn King, Governor of the Bank of England, 25 October 2010.

. . . The countries most affected by the banking crisis have experienced the worst economic crisis since the 1930s. . . the direct and indirect costs to the taxpayer have resulted in fiscal deficits in several countries of over 10% of GDP – the largest peacetime deficits ever.

. . . Many remedies for reducing the riskiness of our financial system have been proposed, ranging from higher capital requirements on banks to functional separation and other more radical ideas.

. . . taxes, the Basel capital requirements, special arrangements for systemically important financial institutions and enhanced resolution procedures all have drawbacks . . .

. . . The broad answer to the problem is likely to be remarkably simple. Banks should be financed much more heavily by equity rather than short-term debt.

. . . A market economy has proved to be the most reliable means for a society to expand its standard of living. But ever since the Industrial Revolution we have not cracked the problem of how to ensure a more stable banking system. . . changes in expectations can create havoc with the banking system because it relies so heavily on transforming short-term debt into long-term risky assets.

4. Roger Bootle, 05 Feb 2012.

. . . People of a certain cast of mind find modern economic life unacceptably messy, so they seek a complete monetary solution. In pursuit of their quest, they often take on the characteristics of a religious sect’s veneration of the sacred texts. . . In practice, we seem, quite rightly, to be heading for a separation of banking functions; increased preparedness for non-core banks to collapse, and tighter regulation of the whole financial sector.

On top of that, I would advocate a stronger emphasis on asset prices and financial stability in the setting of interest rates. Yes, compared to the radical solutions on offer, it is messy – but then, so is the world.

5. Three Rs., 3 May 2012.

The governor of the Bank of England, Sir Mervyn King . . . said that three reforms topped his list: regulation, resolution and restructure.

“When, as it will, the economy returns to normal, our role will be to take away the punchbowl just as the next party is getting going . . . We need to ensure that more of banks’ shareholders own money is on the line, and banks rely correspondingly less on debt.”

. . . He acknowledged that from time to time a bank would fail, so . . . a resolution mechanism is needed . . . that would allow a failing bank to continue to provide essential services while its finances are being sorted out.

. . . Finally he re-iterated his support for the recommendations made by the Independent Commission on Banking, chaired by Sir John Vickers, on restructuring the banking system. The main idea concerns ring-fencing High Street banking operations so that they have their own financial cushions in case something goes wrong with the rest of a bank’s operations, such as at its investment bank business.


1. Krishna Guha, Financial Times, 14 May 2008.

The US Federal Reserve is reconsidering the way it deals with asset price bubbles in the wake of the housing and credit bust, in a move that could see the central bank using extra regulation – or even interest rates – to fight unjustified increases.

. . . The Fed has long stood out among central banks as the least willing to . . . “lean against the wind” when asset prices are rising rapidly. Former chairman Mr. Greenspan argued it was in practice impossible to identify bubbles before they burst . . . Ben Bernanke, the current Fed chairman, endorsed the Greenspan view in 2002 following the bursting of the dotcom bubble, although with the caveat that central banks should use microeconomic regulation to mitigate the risks caused by bubbles. Six years on, he and other top Fed officials are reviewing the Fed approach following the second big and disruptive bubble in a decade.

Extracts from a longer version of an article by Samuel Brittan that appeared in the Financial Times 11/09/08.

What does the great credit crunch do to the case for competitive capitalism? . . . Politicians in both the Blair and the Brown wings of the Labour Party . . . and many others have not only risked their careers to make the case for market forces, but have had to jettison their deepest lifetime convictions. This is not to speak of non-partisan working economists who have spent years explaining competition and the market mechanism to their not always sympathetic employers. Are they now to stand on their heads and say that they have been wrong all along?

. . . Even if the alarmists are wrong and in the end we suffer no more than average post-World World War Two recession they will still be able to say that we had a narrow escape due to the readiness of leaders like Hank Paulson, the US Treasury Secretary, not merely to jettison free market principles but to take risks with common prudence to bail out US corporate bodies.

. . . There can be market failure due to environmental overspill, monopoly power, lack of incentive to provide public goods and numerous other factors. But if we look to officials for remedial action they . . . are subject to “government failure”, a simple example being the capture of regulatory authorities by those whom they are supposed to regulate. Moreover the conditions that favour innovation and entrepreneurship are not always the same as those which provide for the best outcome at any given moment. Where one ends up in this debate probably depends more on temperament than econometrics. . .

“The Origin of Financial Crises” (Harriman House £16.99) by George Cooper . . . attempts to relate apparently esoteric financial issues to elementary economic theory. Cooper has worked for several financial institutions and ended up as London head of interest research at JP Morgan. . . Cooper’s main contention . . . asset markets are peculiarly vulnerable to boom and bust, and are therefore the real destabilising force in the financial system, while central banks concentrate on consumer prices which he believes will largely take care of themselves if asset prices behave.

. . . the Efficient Markets hypothesis . . . blossomed out into the belief that assets are always and everywhere correctly priced. Indeed there were analysts who believed that the Nasdaq Composite Index was correctly priced at 1,140 in March 1996, again correctly priced at 5,048 in March 2000 and still correctly priced in October 2002 when it fell back to 1,140. No doubt . . . someone at random in a Wall St or Throgmorton St bar . . . will probably never have heard of the Efficient Markets hypothesis, but I will take Mr Cooper’s word that it lies at the basis of the models prepared by those famous rocket scientists in the backrooms. And in diluted form it may lie behind the reluctance of modern central banks to act on asset bubbles. This contrasts with the dictum of the old school Fed chairman McChesney Martin that the Fed’s job was “to take away the punchbowl just when the party gets going”. . .

Cooper’s most novel doctrine is that investors do not have to be irrational to generate bubbles. They simply do not have the knowledge required by the Efficient Markets hypothesis. . . I feel confident that the rethink which is bound to follow the present credit crunch is bound to make more room for asset prices in central bank objectives than exists today . . .

Cooper traces present difficulties to the rapid growth of credit encouraged by the Fed’s ultra cheap money policy of a few years ago. . . the effects of . . . large Chinese and OPEC saving surpluses. . . it may be that the US could have continued to be a consumer of last resort even without a Fed stimulus.

3. Why we must halt the land cycle.
Martin Wolf, Financial Times, 8 July 2010.

Those who do not learn from history are condemned to repeat it. This applies not least to the immense financial and economic crisis into which the world has fallen. So what lay behind it? The answer is the credit-fuelled property cycle. The people of the US, UK, Spain and Ireland became feverish speculators in land. Today, the toxic waste poisons the entire world economy.

. . . property taxes are low and gains tax-free . . . it makes it necessary for the state to fund itself by taxing . . . labour and capital . . .

In his new book, David Willetts, the universities minister, emphasises the unfairness of the distribution of wealth across generations. The rigged land market is the biggest single cause of this calamity.

. . . the opportunity for speculation in land both fuels – and is fuelled by – the credit cycle, which has . . . yet again destabilised the economy. . . A host of agents gain fees from arranging, packaging and distributing the fruits of such highly speculative transactions. In the long upswing (the most recent one lasted for 11 years in the UK), they all become rich together, as credit and debt explode upwards. Then, when the collapse comes, recent borrowers, the financial institutions and taxpayers suffer huge losses. This is no more than a giant pyramid selling scheme and one whose dire consequences we have seen again and again.

. . . If “a crisis is a terrible thing to waste”, here is an urgent case for action. Socialising the full rental value of land would destroy the financial system and the wealth of a large part of the public. That is obviously impossible. But socialising any gain from here on would be far less so. This would eliminate the fever of land speculation. It would also allow a shift in the burden of taxation. Perhaps as important, with the prospects of effortless increases in wealth removed, the UK might re-examine its planning laws. There is panic about the dire consequences of such a liberalisation of restrictions for the countryside. It is worth noting, however, how little is needed: an increase of just three miles in the radius of London would raise the capital’s surface area by 50 percent. Would this really be the end of England’s green and pleasant land?

I do not expect any government to dare to wean the English from their ruinous trust in land speculation as the route to wealth. But I can hope. It is bad enough that the result has been expensive houses and inefficient taxes. But it is surely far worse that such insane speculative fevers have ended up destabilising the entire global economy.

Three Rs: regulation.

1. Tracy Corrigan, The Daily Telegraph, 26 March 2010.

A year or so after the near-collapse of the banking market, Labour is claiming credit not only for its role in averting disaster, but also for fixing the system. A few more tweaks are needed, according to Alistair Darling, but recovery is under way, and plans to fix the international regulatory framework are on track.

. . . Mr Darling . . . was right to rescue the Royal Bank of Scotland and Lloyds Banking Group; and the Government seems highly likely to recover the cost of the bail-out (I reckon the investment will turn a decent profit, though this will be dwarfed, sadly, by the fall in tax revenues as a result of the economic downturn).

. . . In Wednesday’s Budget speech, Mr Darling claimed: “Under our presidency of the G20 last year we put in place a plan to reform the international regulatory system.” Then he added: “But we still need to do more to strengthen global banking. The G20 countries must put in place new rules on capital and liquidity by the end of the year. And we also need to reform remuneration practices, improve cross-border resolution for when banks fail, and ensure international standards are implemented. More countries now agree on the need for an international systemic tax on banks. . . ”

. . . The reality is that after nearly two years of bills and directives and crackdowns, there has been limited progress in the two most important areas of global reform: capital and liquidity requirements, and accounting rules.

As Anton Valukas’s report on the collapse of Lehman Brothers showed, variations in accounting rules in different jurisdictions create holes for banks – and other businesses – to exploit. Despite the stated commitment to regulatory reform at the highest levels of government, there has been no discernable attempt to standardise accounting treatment.

. . . As for capital rules, it is all very well for Mr Darling to insist that there must be global agreement by the end of the year, but I doubt there will be. There never has been – the US refused to sign up to the last accord, known as Basel II . . .

Then there is tax. Mr Darling says he is backing an internationally administered systemic risk tax, the proceeds of which would go to national governments. It’s a reasonable idea, in theory, to make banks pay for the right to take excessive risk, though turning it into a workable plan makes standardising global accounting rules sound like fun. . .

The Government is not content with making the system safer; it also wants to ensure banks are lending to the right people. It is certainly an important part of their role to lend to the small businesses which are the backbone of the British economy. So in this week’s Budget, it was announced not only that RBS and Lloyds have committed to lend £41bn to small businesses over the next 12 months, but also that there will now be a Small Business Credit Adjudicator with statutory powers to enforce judgments.

. . . My problem is not that I believe the Government to be bank-bashing. I’m not averse to a little bashing . . . My worry is that banks are being knocked in too many different directions, and that the result will simply be a different-shaped mess.

2. The Second Bagehot Lecture.
Mervyn King, Governor of the Bank of England, 25 October 2010.

. . . When investors change their view about the unknowable future – as they will occasionally in sudden and discontinuous ways – banks that were perceived as well-capitalised can seem under-capitalised with concerns over their solvency. That is what happened in 2007-08. As the IMF have pointed out, differences in capital ratios failed to predict which financial institutions would be vulnerable in the crisis . . . Only very much higher levels of capital – levels that would be seen by the industry as wildly excessive most of the time – would prevent such a crisis.

. . . If only banks were playing in a casino then we probably could calculate appropriate risk weights. Unfortunately, the world is more complicated. So the regulatory framework needs to contain elements that are robust with respect to changes in the appropriate risk weights, and that is why the Bank of England advocated a simple leverage ratio as a key backstop to capital requirements.

3. Brian Fallow,, 19 April 2012.

. . . authorities such as the Reserve Bank are equipping themselves with “macroprudential” tools to head off incipient asset booms and lessen their reliance on the blunt instrument of a policy interest rate. These include powers to regulate loan-to-value ratios or to require banks to hold more capital relative to the size of their loan book.

4. Patrick Jenkins and Brooke Masters, Financial Times, 10 September 2012.

. . . an EU-wide banking review. . . is . . . expected to endorse the direction of several global reform initiatives – including the move to Basel III capital and liquidity rules and the introduction of a leverage ratio to cap the size of balance sheets relative to capital.

5. Martin Wolf, Financial Times, 26 June 2013.

. . . the vulnerability of the financial system . . . to big declines in prices of safe-haven bonds . . . is purely market risk, not credit risk. That can be managed by a mix of lower leverage and, if necessary, regulatory forbearance. It is unlikely that markets would cease to fund systemically significant financial institutions that have only mark-to-market losses on safe-haven government bonds.

6. Martin Wolf, Financial Times, 16 April 2014.

No solvent government will allow its entire banking industry to collapse. Leveraged institutions whose liabilities are more liquid than their assets are inescapably vulnerable to panics. In a panic, it will be difficult to distinguish illiquidity from insolvency. These three points shape my views: the state stands behind banking even though it might not stand behind individual institutions.

. . . Unfortunately, despite efforts in that direction, bank leverage remains too high. The US has now proposed a (non-risk-weighted) equity ratio of 5 per cent for large bank holding companies. But it is too easy for a bank’s assets to lose 5 per cent of their value. Funding by equity should be at least 10 per cent of the balance sheet and ideally more.

. . . higher equity requirements than the businesses alone would want are needed for all leveraged institutions. Systemic risks are the issue. Capital requirements related to such risks are needed, be the components of the system a few giants or a multitude of minnows.

7. The Times, 4 Febrary 2017.

We know what happened when the strict capital reserve and liquidity ratios placed on banks in the 1960s and 1970s were abandoned on both sides of the Atlantic in the 1980s and 1990s. Of course, the 2008 financial crisis cannot be blamed entirely on dereguation. There was plenty of misregulation, too, especially when it came to policies encouraging home ownership. But the relaxation of capital requirements clearly contributed.

. . . Mr Trump’s cry of “free the banks!” just as American financial institutions have returned to growth and stability . . . seems, at best, unnecessary, and, at worst, reckless.

. . . The president’s order of a rollback of the Dodd-Frank legislation governing financial services and Wall Street this week was accompanied by a . . . move from Patrick McHenry, Republican vice-chairman of the House Financial Services Committee . . . ordering the Federal Reserve to stop participating in international regulatory banking initiatives because they “unfairly penalise” American institutions.

Three Rs: resolution.

1. Paul Volcker, former chairman of the US Federal Reserve.
Financial Times, 14 February 2012.

. . . I am . . . encouraged by efforts under way by the US, British and other authorities to reach the needed degree of consensus with respect to resolution authority. . . to end the “too big to fail” syndrome. . . The major banks are international and managing their orderly merger or liquidation will necessarily involve co-operation among jurisdictions.

2. Brooke Masters and Shahien Nasiripour.
Financial Times, 21 May 2012.

The “resolution plans”, being worked on by the Bank of England and the Financial Services Authority in the UK and the Federal Deposit Insurance Corporation in the US, have focused on “top-down bail-in” measures. These would see the authorities take over a failing group and force its shareholders and bondholders to take losses while keeping critical operating companies open.

The UK and US authorities believe that if they can come up with resolution plans for their banks, it will encourage other regulators who are moving more slowly in preparing responses, into doing the same. . . The pilot project builds on “living wills” drafted by banks themselves, but goes much farther . . . The work focuses on at least five US-based “global systemically important financial institutions” who do between 80 percent and 95 percent of their overseas business through the UK, and two UK counterparts, which are similarly focused on the US. . . The Financial Stability Board, a global regulatory body, has called for all 29 GSifis – eight from the US, four from Asia and 17 in Europe – and their regulators to write living wills by the end of this year. But some countries are behind schedule.

3. Philip Aldrick, The Times, 26 February 2015.

Senior Bank of England officials have been warned against . . . believing their own rhetoric about ending the threat from too-big-to-fail banks as there is still no realistic alternative to taxpayer bailouts in another financial crisis.

Julia Black, professor of law at the London School of Economics, said that politicians would have to intervene in a repeat of the 2008 crisis . . . “We know we can handle the failure of a national bank,” she said. “. . . we can’t handle the failure of a multinational bank in a global systemic context. Resolution of too-big-to-fail is a political decision . . .” . . . Professor Black warned that the introduction of a resolution regime for banks, which in theory would force shareholders and creditors to pick up the tab rather than taxpayers, would breed complacency.

During the financial crisis, government ministers injected £65 billion . . . into Royal Bank of Scotland and Lloyds Banking Group, nationalised two banks and a building society and provided almost £1 trillion of broader support for the sector to prevent a far deeper depression.

4. Harry Wilson, The Times, 14 April 2016.

Emergency plans submitted by five of America’s biggest banks have been rejected by regulators.

. . . The . . . chairman of the Federal Deposit Insurance Corporation said that the resolution plans submitted by the banks . . . are not credible or would not facilitate an orderly resolution under bankruptcy . . . Having a recovery plan in place is intended to help officials to safely close down a big bank in a way that would minimise the impact on other businesses and the financial system.

Three Rs: restructuring.

1. The Second Bagehot Lecture.
Mervyn King, Governor of the Bank of England, 25 October 2010.

. . . if banks undertake risky activities then it is highly dangerous to allow such “gambling” to take place on the same balance sheet as is used to support the payments system, and other crucial parts of the financial infrastructure. . . Ultimately, we need a system whereby the suppliers of funds to risky activities, whether intermediated via banks or any other entity, must understand that they will not be protected from loss by taxpayer bailouts. Creditors should know that they will bear losses in the event of failure.

. . . Regulators will never be able to keep up with the pace and scale of financial innovation. Nor should we want to restrict innovation. But it should be undertaken by investors using their own money not by intermediaries who also provide crucial services to the economy, allowing them to reap an implicit public subsidy. It will not be possible to regulate all parts of the financial system as if they were banks.

2. Katherine Griffiths, The Times, 14 September 2011.

. . . under the model suggested by the Independent Commission on Banking . . . Britain’s banks must introduce a firewall or “ring-fence” around their lending . . . to households and small businesses, with that entity holding minimum high-quality capital of 10 per cent. The global investment banking operation will sit outside of the structure.

3. Paul Volcker, former chairman of the US Federal Reserve.
Financial Times, 14 February 2012.

I confess total surprise about the complaints by some European and other foreign officials about the restrictions on proprietary trading by American banks embedded in the Dodd-Frank Act – now dubbed the “Volcker” Rule.

. . . For reasons analagous to those behind the Volcker Rule, the UK is planning to “ring fence” trading and investment banking from retail banking, creating airtight subsidiaries of larger organisations. The commercial banks responsible for what are deemed essential services to the economy will be insulated from all trading and only then will they be protected by the official safety net of access to the central bank, deposit insurance and possible assistance in emergencies.

That approach . . . resembles the seemingly less draconian US restrictions on proprietary trading.

4. Patrick Jenkins and Brooke Masters, Financial Times, 10 September 2012.

Europe’s big banks could be forced to ringfence trading assets under a plan emerging as the consensus recommendation of an EU-wide banking review. . . a majority now favoured a combination of the US and UK approaches to structural reform of banks.

The central tenet of the US Volcker rule is a ban on . . . proprietary trading, which involves betting the bank’s own money. Britain’s Vickers Commission concluded that retail banking activities should be ringfenced from universal banks’ investment banking operations.

5. Aimee Donnellan, Sunday Times, 14 June 2015.

. . . the plan to split British . . . banks . . . requires big institutions with investment banking and retail arms to put the latter into stand-alone companies by 2019.

. . . Bank bosses are urging George Osborne to water down the regulatory requirement and alter the bank levy, the annual tax on their global earnings . . . Sir John Vickers, author of the plan . . . said . . . the government would find it hard to convince the public that restrictions should be eased, given the impact of the financial crisis.

6. Trump orders Dodd-Frank review.
Dominic Rushe

. . . the Dodd-Frank Act . . .enacted to ensure there would never be another 2008-style meltdown . . . was a sweeping, bipartisan plan to overhaul the financial regulatory system after the worst crisis since the Great Depression. . . The aim was to more closely monitor big institutions that are “too big to fail”, and to limit the types of risks they can take.

Trump had promised to dismantle Dodd-Frank, claiming it was holding back lending and tying up business in red tape. Among the most vulnerable areas of the act is the so-called Volcker rule, first proposed by Paul Volcker, the former Federal Reserve chairman.

The rule seeks to put a firewall between a bank’s consumer operations and its risky trading activities, and to ensure that the bank is not making bets against the interests of its customers, as many did by betting on a housing collapse while selling mortgage-backed bonds.

. . . Lisa Donner, executive director of lobby group Americans for Financial Reform . . . said dismantling Dodd Frank would not be easy. “This is a law that was passed by Congress and needs to be changed by Congress. It can’t be done by fiat.”

. . . Donner said the move was “a stunning betrayal of what Trump promised on his campaign trail . . . to protect us by standing up to Wall Street.”

Further reading.

The search for a stable economy.


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