Financial Regulation to Reduce Instability

The financial crisis of 2007/8 was a reminder of the need for financial regulation to reduce instability and avoid the need for bailouts.

Since deregulation, the financial sector’s shareholders and employees have benefited at the expense of the rest of society, in a “heads I win, tails the taxpayer loses” relationship.  America’s Troubled Asset Relief Program (TARP), which was explained on a web-page, TARP Programs, was an example of a taxpayer rescue after the financial crisis in 2007-8.

It has become necessary to prevent further instability, so several measures are being implemented or considered:

●  As was mentioned above (, measures have already been agreed to reduce banks’ leverage ratios so that they are less exposed to large numbers of failed loans.  At the time of writing, not all banks have yet sufficiently recapitalised – and  Anat Admati and Martin Hellwig have argued that the target should be higher, as described in an EconTalk interview: Admati on Bank Regulation and the Bankers’ New Clothes.

●  Another approach has been advocated in The Telegraph and elsewhere: Bring back Glass-Steagall and let investment banks gamble and fail.  The Glass-Steagall act was implemented in 1933 after the Great Depression to separate American investment banking from retail banking.

●  It has also been suggested that some of the larger organisations should be broken up, so that none is ‘too big to fail’, and then allow those that collapse to declare bankruptcy so that they can be restructured.  An advantage of allowing some organisations to fail is that others would be more prudent – knowing that they too would not be rescued.

●  Governments now own more of the banking system than they used to and there have been calls for yet more public ownership.  This would be expensive to accomplish and the result would be a less flexible and innovative system, which would employ fewer people and pay less tax.

Any governance solution has to be considered on a global basis, because money can be rapidly transferred between countries – and financial services organisations can choose where to have their headquarters.  This is part of a wider subject – the restructuring of the global financial system – which is reviewed later in this chapter (3.5.5).



This page is intended to form part of Edition 4 of the Patterns of Power series of books.  An archived copy of it is held at https://www.patternsofpower.org/edition04/3344.htm.