Banks "too big to fail" did they really meet their Waterloo? | Richard Partington | Business

Historians have recorded turning points for time immemorial. The crossing of the Rubicon by Caesar, the Boston Tea Party for the United States, the British triumph in Waterloo and the decline after Suez.

For the capitalism chroniclers, the collapse of Lehman Brothers ten years ago is the major tipping point of modern financial history. The speech in the city will be days before Lehman and those after.

A new economic era has emerged for Britain and most rich countries when the US investment bank became the largest company to file on September 15, 2008 with more than $ 600 billion worth of investment. assets, about $ 2,000 for each woman and child. in the United States at the time.

It has caused the biggest economic shock since the Great Depression and is now known as the Great Recession. UK real GDP fell sharply in 2009 and did not return to its pre-crisis level until 2013. Business investment fell sharply in 2009 and took a long time to recover. in 2015 to return to their 2007 peak.

A decade later, productivity growth stagnated and household debt reached dangerous levels as government austerity was needed to repair the city's temerity.

When Lehman went bankrupt, the idea that governments should rescue failed businesses was still anathema to George Bush. Yet politicians around the world quickly realized that the domino effect of its collapse could not be ignored.

The banking system and its biggest titans were too big to fail. Their losses had to be socialized to avoid the ravages of the standard of living, despite decades of huge profits that went into private hands. Consumers would lose access to their bank accounts and businesses would not be able to borrow if no action was taken.

Subsequently, politicians and bankers, like guilty children seeking to do penance, promised that it would not happen again – the time had come to "finish too big to fail". This is the great story of the past decade in finance.

Much progress has been made. Mark Carney, the governor of the Bank of England, estimates that capital needs of banks have increased ten-fold in ten years, while asserting their ability to pass simulation tests simulating a financial apocalypse worse than that of 2008. , he says.

RBS, the UK's crisis girl, has increased its share of funding set aside to protect itself from potential losses of 2% before its taxpayer-funded bailout, to about 16% today. . The industry was forced to separate the riskier investment banking from day-to-day retail banking and establish "living wills" stating how they would fail safely.

Yet the cost of failure will always be too high. As Sisyphus condemned to push a huge stone on a hill for all eternity, the work can never be finished.

Warren Buffett, perhaps the most famous investor in the world, knows that no big bank will ever have the right to fail. The bank represents an implicit guarantee of the government, making it one of the safest investments.

Despite a decade spent trying to eliminate taxpayers, the power of the industry remains more focused than ever with four major players. Share sales have started, but RBS remains majority owned by the state.

Former CEO Fred Goodwin was expected to receive about £ 350,000 a year from his RBS pension, as he was leaving at sunset, leaving behind a burnt wreck. It's about 3 million pounds since 2009, from a bank that basically remains a district of state. Not a single bank chief or president went to prison here or in the United States. The moral reward hazard for failure remains.

The glittering towers of Canary Wharf or the city could be powerful symbols of free market capitalism, but they are sponsored by the state. The financial system is a socially perverse enterprise. This is the ultimate beneficiary of social assistance.

The support to the banks during the 2008 crisis has reached a peak of nearly a trillion pounds to rescue banks from collapse. And the money continues to flow ten years after Lehman.

George Osborne's purchase assistance program helps support the mortgage industry, with approximately $ 9 billion in equity loans, helping to support a larger 1.4-billion-dollar market billion pounds. With the Conservatives in power, the sale of mortgages can only be a winning bet.

The term financing system gave 127 billion pounds of cheap loans to banks, provided they continued to lend after the vote on Brexit two years ago.

The financial services clearing system guarantees the deposits of each individual customer of a UK bank up to £ 85,000. Since then, banks have become more dependent on our cash flow, with approximately 87% of funds withdrawn from depositors.

The New Economics Foundation estimates that the industry receives about £ 23 billion of its ability to create loans and receive income, in another hidden grant.

For all this independent support, we have relatively little say in how banks are managed and how our money should be used.

There are plenty of options. Competition could be improved to reduce the impact of a bank failure on the economy. The big four could be divided by force or more support provided to the challengers. Labor proposes to turn RBS into a network of local banks and the idea has merit.

In addition to setting interest rates and monitoring the stability of banks, Threadneedle Street could impose credit orientation rules, directing bank loans to higher levels of productive investment in the economy.

Politicians could have more say when bank branches are closed or the cost of credit for the poorest customers, who are systematically scammed by high-cost suppliers.

A national investment bank could be useful, as proposed by the IPPR Committee on Economic Justice. While public institutions may fail in the same way as the private sector, there is more responsibility and evidence from around the world that they can also succeed.

Christine Lagarde warned last week that the banking sector was "safer, but not safe enough" 10 years after Lehman, while the industry pushes back the rules introduced since the crisis.

The Brexiters want fewer rules for the city, while Donald Trump is committed to undoing some of the key post-crisis reforms in America.

This should never be allowed. Greater action of the state is required, not less. Otherwise, the world could reach a tipping point once again Lehman's age.