23 Mar 2010

Banks' 'too big to fail' defence excoriated

8:31 am on 23 March 2010

New global financial rules are needed that lets banks fail without having to be propped up by taxpayer support to avoid a financial meltdown, according to a visiting academic.

Professor Ken French, of Dartmouth College in the United States, is part of a group of 15 academics advising policymakers on reforming financial regulation, and was in New Zealand last week.

"What this notion of 'too big to fail' means' is 'We're going to consume $1.10 to produce something that society values at $1, and the Government's going to kick in the other 10%' - and I could spend all day explaining all the evils of that."

He says the financial system meant banks took bigger risks than the cost of their actions - but there is no silver bullet to improving the rules. Trying to claw back bonuses from bankers in order to soothe public anger is the wrong approach, however.

Instead, he says, part of a bankers' compensation should be held back for a certain period to make sure their actions match that of society.

In the US, Senator Chris Dodd is proposing the Federal Reserve retain control over the banking sector and gain new powers to break up large firms that could threaten economic stability.