Douglas Carswell

01 DEC 2016

How to fix Britain's broken banks

Three of Britain's biggest banks failed the Bank of England's latest stress tests. Despite billions in bailouts, interest rate cuts, and new regulations, our banks still aren't any more secure. Doesn't that suggest governments got their response to the financial crisis wrong?

This year's stress test was meant to mimic the economic conditions of the financial crisis. So it's ominous that RBS, Barclays, and Standard Chartered all failed. None would have sufficient capital to withstand another shock.

That's an indictment of the response to the financial crisis.

We were assured that there was no alternative to bailing out the banks, because they were too big to fail – notwithstanding the cost to taxpayers, who still own a majority stake in RBS.

We were told ultra-low interest rates and quantitative easing was essential to keep banks liquid – in spite of the dire consequences for savers.

But we were promised that new regulations would make sure that banks were much better capitalised, so they wouldn't have to be bailed out at our expense again.

In reality, though, all governments, central banks, and regulators did was to reward banks for failure – and repeat the same mistakes that caused the crisis.

They allowed banks to privatise profits, while socialising losses. They made credit too cheap, incentivising banks to issue too many high-risk loans all over again. They never significantly raised capital requirements.

The precarious state of Britain's banks today comes as no surprise to UKIP in parliament. Last year, we published a paper warning that banks' capital ratios were far too low, while the Bank of England's stress tests were far too weak. In fact, the only surprise is that the test seems to have been toughened up.

Our paper recommended that banks need much higher leverage ratios: not 3%, as mandated by Basel III, but 15%. Interest rates also gradually need to rise.

But to make the financial sector secure in the long-term, we have to go further still.

The only way to stop bank failures is to rein in the excesses of fractional reserve banking. To do that, we need a legal separation between deposit accounts and loan accounts – as I wrote in my pamphlet After Osbrown. Banks should no longer be able to lend on deposits multiple times over as a matter of course.

The banking crisis wasn't a failure of capitalism. It was a failure of government. Around the world, governments incentivised banks to take reckless risks by protecting them from the consequences of their own decisions. To fix the financial system, that's what needs to change.

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