business economics

What does a good banking system look like?

Here in the UK, the Vickers Commission on Banking Reform is looking at how to reduce risk and increase transparency in the banking system. It’s an independent commission that will report back to the government, and it has been gathering submissions. It’s brought out all kinds of ideas and created an opportunity for a bit of dialogue around what we want out of our banking system. Whether or not it delivers any serious recommendations remains to be seen, and we’d still need the government to act on them, but at least we’re having the debate.

One recent contribution comes from the , a project from the New Economics Foundation and Compass. Their report on good banking asks the simple question of the title, what would a good banking system look like? It’s the results of a consultation between 100 or so banking experts, and it looks at the separation of investment and retail banking, fair taxation of the financial system, and the problem of financial sector lobbyists. It also features a number of topics I’ve written about here, including the Post Bank, ratings agencies, and banker’s incentives.

One key conclusion is that the Vickers Commission doesn’t go nearly far enough, because it hasn’t asked the most basic central question. “It is hard to see how any process of reform can be successful without first answering the question ‘what do we expect the financial system to deliver?'” the report suggests. “The question has not been properly asked, let alone answered, by the government or the Vickers Commission.”

What do we want our banking system to do? Here’s a pretty good summary:

‘To facilitate the allocation and deployment of economic resources, both spatially and temporally, to ecologically sustainable activities that maximise long-term financial and social returns under conditions of uncertainty’

You can (pdf)

4 comments

  1. I think you really hit the nail on the head: “What do we expect the financial system to deliver?”

    I think where the principal conflict lies in that society needs the financial system to efficiently put capital to use longterm whereas shareholders and owners demand maximum profits in the short term.

    Solve that conflict and you ought to be able to come up with a decent framework.

  2. “To facilitate the allocation and deployment of economic resources, both spatially and temporally, to ecologically sustainable activities that maximise long-term financial and social returns under conditions of uncertainty”

    This is a very good answer (from p.2 of the report). My quibble (and it probably turns out to be a rather large one, though it is a point I thought that at least some at NEF would be sympathetic to) is with the inclusion of “financial” returns in what is to be maximised. By placing “financial” next to “social”, it seems to imply that these two are equal considerations, rather than one being the servant of the other. Any financial returns that destroy social returns are a net loss. Financial returns that damage some social returns while improving others need to be judged on their merits. But the point is that finances are only ever an instrumental goal.

    OK, now that I think about it, I also have a problem with maximising. But that is an even deeper theological question, I think.

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