Banking Reform: Which way forward?

Banks are back on the agenda now that the "Future Of Banking Commission", chaired by David Davis and featuring Vince Cable has reported back. BBC report here, full report here.

Many of the proposals are pretty mundane. Stricter disclosure rules, a mandatory "opt-in" system for unauthorised overdrafts and pushing depositors up the priority list on bankruptcy all make sense. These proposals all accept free-markets and accept the fundamental desirability of individuals making their own informed choices, they simply aim to ensure that markets and competition can operate.

But what is interesting about some of the proposals is how some of them are remarkably anti-free market. In particular, the Commission wants to introduce "standard products for some basic services which all retail providers have to provide". Can one imagine the government telling Tesco that they MUST sell oranges at a state dictated price? This is truly remarkable, and makes me think of Stalinist Communism more than free-markets. Davis pays heavy lip-service to Conservative ideas with statements like "[we need to]reintroduce the rigours of effective competition and market discipline to financial services", but many of the proposals he backs are simply incompatible with any sort of ideology somewhere to the free side of Genghis Khan.

The nannying continues. The Commission appears to be concerned with "off-market" derivatives trading. Even though such trading is conducted solely by experienced professionals who fully understand the risks and are prepared to lose money, the Commission sees fit to impose registration, regulation and margin requirements. The financial crisis was caused by risk being under-priced, mis-allocated and under-estimated. In short, it happened because risk hit those who could not bear it. It is simply nonsense to try and use the crisis to regulate those who knew exactly what they were doing. In any event, institutions such as hedge funds who made investments traditionally seen as highly 'risky' seem to have done very well!

So there we have it. One of the darlings of the Conservative right has decided that markets which allow individuals to make their own choices isn't such a good idea, after all. Despite being a man of left-wing views, this report is a perfect example of how even right-wing politicians make one of the worst follies of state-hood. It sees a problem, twists the problem and regulates an inappropriate response; whilst completely ducking the real causes of the crunch.