This has to be a fault in the reporting.
\”When things get really bad, ultimately the only part of the economy that can provide capital is the fiscal authority\”, he said. \”But that doesn\’t necessarily mean the cost of providing it should fall on the general taxpayer. If banking sees that in systemic crises the banking industry would have to pick up the bill, I would like to think that would change incentives and behaviour,\” he said.
I refuse to believe that a deputy governor of the Bank of England would be so silly.
He\’s ignoring free riders.
If the banking system were monolithic, this would of course work. In part, at least. But the banking system isn\’t monolithic. There are over 400 in The City with banking licences alone as an example. So the idea that \”the banks\” will have to pay to clean up any messes doesn\’t work, for it won\’t stop one or three or ten going off and taking stupid risks. If they succeed then they\’ve made loads of dosh: if they don\’t then they go bust and the other 390 have to pick up the costs.
This is exactly the same as the incentive structure facing bonus hungry short term traders right now. Make a profit and get a chunk, lose and someone else picks up the bill.
The only way it could or might work is if you\’ve got something like the old Bank of England system. Not rule based (as I\’ve said before, financial regulation is one of the few areas where I\’m happier with the rule of men that the rule of law) but smoke filled rooms with heads knocked together based. If the Bank of England regains the power to simply say \”Look old boy, we don\’t like your business model, please stop\” and with the threat (a believable one, of course) that the rest of The City will simply not trade with one under such a cloud then, and only then, can such a system of the survivors picking up the costs for the failures work.
For only then do we have a sanction against those who are risking such costs to the others.
It\’s theoretically feasible of course that it could be the club of bankers themselves which exercise such a power but really: I\’m pretty certain we don\’t want to have a cartel determining who can come in and play in the markets. A cartel controlled by those any newcomer would be competing against.