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Time for banks to fail?

March 3, 2010

A hard-hitting report from the United States warns of a second Great Depression unless urgent action is taken to fix the financial system in the U.S. and G20 countries. It argues that the economic system is in the grip of a “doomsday cycle”: Banks behave recklessly during the boom part of the cycle, confident in the knowledge that during the bust “they can walk away and let the state clean up”.

Despite the damage caused by the  crisis, nothing has changed to alter financial institutions’ attitudes to risk, claim the authors: “It is now obvious that risk-taking at banks will soon be larger than ever. […] nothing has changed to make us believe the regulatory system will succeed this time, when it has failed so enormously – and repeatedly – in the recent past. To bring about the dramatic change that is needed also requires international cooperation and consistency.”

The report sets out its own fresh ideas for regulating financial markets, and places special emphasis on the need to make banks and their shareholders pay the price of their mistakes. The proposals, says the report, would “serve to prevent, detect, and credibly resolve financial crises. Making markets work as a system is the focus — emphasizing transparency, competition, and the important discipline of failure.”

The report, Make Markets be Markets, was written by a number of contributors, including Dr. Robert Johnson , who serves on the UN commission of experts on financial reform, and Prof. Elizabeth Warren, who chaired the congressional oversight panel on the U.S. crisis bailout. Its findings are being discussed at a conference organised by the Roosevelt Institute in New York today (Wednesday March 3).

Useful links

OECD Policy Framework for Effective and Efficient Financial Regulation

The OECD’s Adrian Blundell-Wignall discusses U.S. proposals for bank reform

OECD work on financial markets

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