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Economics

Sound money for Europe

You can be sure that most of my colleagues in the European Parliament do not embrace the concept of the free market. Day after day, I hear them speaking up for the protection of established interests or attempting to regulate away risk. However, there is one area where there is a genuine coalition of interests and that is the need for banking reform.

Despite all the legislation, nearly six years after the run on Northern Rock and almost five years since Lehman Brothers collapsed, we’ve endured an onslaught of new financial regulations emanating from Brussels, but we haven’t solved the fundamental problem. If a bank went bust tomorrow it would still need taxpayers to bail it out. The Left hate bail outs because they believe taxpayers’ money should be spent elsewhere and not on subsidising what they see as “rich bankers.” While those of us who believe in free and open markets think that companies that fail ought to be allowed to go bust to allow better-run rivals and new entrants to fill the gap in the market. This coincidence of interests has formed the basis of the Left-Right coalition.

For the last few years, I have been pushing three items within the family of Cobden Centre proposals: no taxpayer bail out; director liability and sorting out IFRS accounting standards.

We have spent the past five years introducing legislation that does not tackle the fundamental problem of banks needing bailouts when they fail. I have been making this point for several years and it seems that finally other legislators share this view.

In a report on banking reform adopted by the European Parliament in early July, there was genuine agreement on the need for an overhaul of the banking sector. Most political groups agree that supervisors will need to spell out procedures to wind down failing banks without taxpayer funding and to create a scheme to allow customers of failed retail banks to continue to pay their bills or withdraw money from ATMs until ownership is resolved.

However, we have to be realistic and recognise that at some point, governments will be tempted to use taxpayers money. Therefore, we agreed to encourage banks to separate wholesale banking activities from retail activities in the event of failure so that the savings of retail savers are not used to subisidise the trading activities in the investment arms of banks. This so-called ringfence need not necessarily be structural but a clear distinction needs to be made.

In the same report, I tabled an amendment which received the support of a large part of the European Parliament that we should explore how to make directors more liable for failure including exploring the feasibility of a return to the partnership model of ownership. Although there are concerns about how this would work in practice, the principles of director liability and the need for a better alignment between performance and reward are now firmly on the agenda.

I have also worked with the Cobden Centre, PIRC and Steve Baker MP to point out the concerns that many investors have expressed over IFRS. This included hosting a packed event in the European Parliament organised by the ACCA where Gordon Kerr from the Cobden Centre spoke alongside representatives from the auditors, the banks and the standard-setters themselves. This discussion helped us to secure the support of all major political groups in the European Parliament for a major review of international accounting standards.

In making the case for a review, it has been important to highlight the apolitical nature of this issue. All political groups regardless of party, are supporting calls for simpler standards that drive better governance and question why banks are able to book unrealised profits without making sufficient provision for potential losses.

In addition, supporters of the work of the Cobden Centre believe it is vital that consumers understand how fractional reserve banking works. This means making consumers aware that when they open bank accounts, their money is not actually on deposit at the bank. I have consistently spoken in parliamentary debates on the need for banks to be much more transparent with consumers when they open accounts and to distinguish between deposit accounts, current accounts where so-called savers are really lending their money to a bank and investment accounts. In time, I hope to be able to introduce amendments pushing for such transparency.

It may be far away and many may question whether the UK should remain a member of the EU, but as long as Britain remains in the EU and I remain a Member of the European Parliament I will continue to seek to influence the debate and share the ideas of the Cobden Centre with MEPs across the political spectrum.

2 comments to Sound money for Europe

  • Governments, under the control of Financial, Insurance and Real Estate (F.I.R.E) are treating the symptoms of the problem and wont address the cure anymore than wiping the patients nose, although it makes you feel better, is no cure for flu.
    The game is really maintain the system at all costs (to everyone else) as wealth is relative. Bureaucrats earning huge salaries are technically bribes to maintain the system and once dependant it is very hard for them to selflessly make themselves unemployed. Therefore anyone within the system who think self interest is a sin, may like to rethink their own situation.
    If a free market were to come about, my business would probably suffer badly as much of its trade is to the City. I would happily accept a large drop in business or even bankruptcy should this happen, knowing that I needed to re-think my business model and start again. Yet I am branded as ‘selfish’ for wanting to keep the rewards of my labour to look after those I wish to and not those I whose content of character have no idea of, who think I should provide a living for them.

  • The ringfence advocated by Syed Kamall is just Vickers writ large. I suggest Kamall reads the scathing criticism of Vickers by Laurence Kotlikoff (economics professor in Boston). See:

    http://www.kotlikoff.net/files/consequences_vickers.pdf

    As regards Kamall’s desire to see “procedures to wind down failing banks”, there is VASTLY BETTER idea out there, which makes bank failure plain impossible. It goes as follows.

    Depositors EITHER put their money into a 100% safe account which is instant access and pays no interest because nothing is done with the money. Alternatively, if they want interest, they put their money into some sort of investment account or vehicle. In that case, as with any normal investment, the risk is carried by the investor, not the taxpayer or anyone else.

    That way it’s plain impossible for a bank to suddenly fail, (though it can slowly decline to nothing). As to safe accounts, the money is safe, and as to investment accounts, depositors carry the risk, not banks. Ergo sudden failure is impossible. Plus there is no reason for bank subsidies.

    That’s the system advocated by Kotlikoff, while Positive Money’s system is similar.

    For a summary of Kotlikoff’s system, see:

    http://www.bloomberg.com/news/2013-03-27/the-best-way-to-save-banking-is-to-kill-it.html

    And for an article along the same lines by John Cochrane (economics profess at Chicago), see:

    http://www.hoover.org/news/daily-report/150171

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