Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

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Monday, September 19, 2011

Time to split banks

UBS has just shown again why banks are not to be trusted.

Historically, banks which lent money (for example to buy houses or fund trade) were separate from banks which traded in securities.  But economists argued that this separation was unnecessary.  Banks, they said,  could be trusted to be sensible.

The GFC has I would have thought decisively destroyed that rosy view of banks and bankers.  The greed and folly of the banks plunged the world into a financial crisis which has still not been resolved.

When banks are "too big to fail" controls and regulations need to be tightened.  Banks involved in trading shares/currencies/derivatives should have much higher ratios of capital to assets than banks lending money to buy houses on conservative loan to valuation ratios.  The Lebanese banking system had no crisis during the GFC because Lebanese banks only lend you 60% of the value of the property.  With bank assets bigger than GDP, it's quite clear that lending banks should be tightly regulated, even as "merchant/investment banks" are not.

No one minds banks losing their own capital.  But when profits are privatised and losses socialised it's time to act.

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