The Financial Crisis 2009 Part III
For such a system to work, banks that take greater risks than the usual “useful” banks must actually be able to go bankrupt. The idea is that the more speculative investment banks and other players who take great risks in the market will face a real, credible threat of bankruptcy. Such a system is not easily easy to establish. In practice, it has turned out that all kinds of banks – at least if they are large enough – have been rescued – time and time again.
This is because banks and other institutions are often so intertwined that one is afraid that the whole system will collapse if one important financial institution fails. Many have learned the lessons of the collapse that followed the bankruptcy of Lehman Brothers. – This does not dare the authorities in the US to let happen again, they say.
6: More regulations?
Another measure, which Sweden has already adopted, is to let the banks pay an extra fee that will go to cover rescue operations in the future. Several other countries have shown interest in this scheme. One problem is that it can be difficult to withdraw as much money as may be needed on the day it hits again.
In the weeks following the Lehman crisis, shorts sales were banned in many countries. Short selling is selling securities you do not own. This is how you can make money on a price drop. For example, you rent a share, sell it and buy it back from another after the price has fallen (the time between sale and purchase can be very short, cf. speculation). In times of recession, it can be big money to make on this. Short selling was banned because many banks the authorities tried to save, were exposed to short selling, and when such a “campaign” is first launched, it can quickly take the form of what we call self-fulfilling prophecy. However, it has not become a more permanent ban. On the whole, the banks have succeeded well in lobbying against various types of bans and restrictions that have been proposed after the crisis.
Another area where many believe that it should be tightened is the market for so-called “credit default swaps” . In reality, these are insurances that can be taken out against securities falling in value. There are two special features of this market. For the first , it is not regulated as insurance, with accompanying stringent capital and reserves to the offering insurance. That is why this business almost overturned the world’s largest insurance company, AIG, when the price of securities linked to mortgages began to fall in the autumn of 2008.
The second is that it is possible to insure against a fall in the price of securities that you do not own. It’s a bit like I could take out insurance against your house burning down. Why should I be able to insure myself against it? Do I have anything to do with that case? If we take the comparison further and imagine that it was also I who had installed the electrical system in the house, we have an idea of the scope of the problem. As of today, it is still allowed to insure against outcomes you have no interests associated with.
Finally, bonuses have been a regulatory issue. The banking sector is characterized i.a. by huge bonuses . According to RCTOYSADVICE, preferably tens of millions of kroner to those who earn the most – even hundreds to some of the tops in some countries (USA and UK). The way the bonus schemes have been designed, this has been a problem because it can tempt people to take enormous risks in the short term . If in the longer term it turns out that a project went completely wrong, the bonus is still long overdue. IBG (I’ll be gone) they themselves say on Wall Street about this form of calculation.
Various regulations have therefore been proposed where the purpose is to postpone – postpone – the payment of (parts of) the bonuses. Among other things, the EU has worked with regulations of this kind. A more radical thought is that too large bonuses in themselves can contribute to undermining morale in the sector. The danger is that people are willing to make themselves thieves only the amount is large enough.
But that the state should be able to have opinions about how much people should earn, is probably a thought that sits further inside. Then it is more realistic with large one-time taxes on bonuses. The United Kingdom has chosen such a solution. Not to change behavior; the reason has rather been that the sector must contribute more to cover the deficit in the state budget.
One area where there will certainly be new regulations is equity requirements. This is a technically demanding topic where different forms of lending are weighted differently depending on how risky they are. Such regulations will – if they become more effective than those that applied before the crisis – make it a little less profitable to run a bank. The ultimate goal that many agree on, however, is that capital requirements should be ” countercyclical ” – ie that banks be punished harder and harder the more they grow in an upswing. The discussion on how to achieve this is in full swing. It’s not easy.