Myth 7: Financial regulation will take away the banks’ profits

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Myth 7: Financial regulation will take away the banks’ profits

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© Belle Mellor

There is no problem with the idea of financial regulation but there is a problem with the practice. Mostly, regulation has been good for bankers. They need protection from each other. They cannot work without regulation.

In the 1950s and 1960s, there were higher levels of regulation, big increases in general prosperity, and almost no financial crises. Banks and everyone did well. When financial deregulation began in the 1980s, general prosperity was not so good and there were many financial crises. Banks became more profitable than any other economic sector. Profits from banks were 40 per cent of all business profits in the US.

This sounds like a happy situation for the banks but things did not stop there. Alan Greenspan was the Great Deregulator when he was boss of the US Federal Reserve. In October 2008, he said, I have found a problem. The theory of financial markets with no regulation is wrong. So wrong, in fact, that the crisis caused by the banks took away their own big profits from the years before.

So, deregulation was not a 100% success even for the banks. One thing stopped it from being a 100% disaster - banks can always say they will stop the flow of money. So governments quickly came to help them and ‘austerity’ arrived for the general public.

The Bank for International Settlements has been overseeing a slow ‘recapitalization’ of banks. This to be completed in around 2019. The theory is that if the banks need to hold more of their own money, they will need less help in a crisis. But they would also have less money to lend, and would make less profit. So the banks are going as slowly as they can with recapitalization. It is very possible that by 2019, recapitalization will not be enough to make banks safe. So this means there are still risks of more crises in the future for the public.

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One group of independent economists says that the regulations we have now are not enough to stop a crisis in the financial system. The causes of the 2008 financial crisis are mostly still there. Big banks are still ‘too big to fail’. The banks have not been broken up and their retail (high-street) and investment (casino) functions are still not separated completely. Banks are still playing with the public’s money.

Mark Carney is the boss of the new Financial Stability Board (FSB) and the Bank of England. He says that some financial institutions are behaving so badly that they could create risks in the system.

The FSB can watch the financial weather, but it cannot change it. By the end of 2013 the world’s top 1,000 banks were back in business, making close to $1 trillion ($1,000 billion) in pre-tax profits; an all-time record, 24 per cent more than the year before.

History tells us that financial crises come every 10-15 years, and that big bank profits are a warning. So the next crisis could come soon. But interest rates are now close to zero and so lower interest rates and bailouts are not there to help in a financial crisis.

In neoliberal economic theory, there is no limit to the profits of banks. In any other economic theory there is no reason for banks to be more profitable than anyone else and no reason for bankers to pay themselves the way they do. They have proved they can destroy themselves and others too. Deregulation, not regulation, destroys their profits. But to save themselves.


NOW READ THE ORIGINAL: http://newint.org/features/2015/12/01/regulation-banking-sector/#footnote-6-ref

(This article has been simplified so the words, text structure and quotes may have been changed).