Obama’s Plan to Break Up the Banking Sector Is Very Welcome
It is a relief that the American president, Barack Obama, wants to seriously reorganize the banking sector. With that, he has broken through the worldwide deadlock, where no country wants to intervene too harshly in the banking sector out of fear of undermining its competitive position in that sphere. Rightly, Dutch Minister of Finance Bos reacted positively to Obama's proposition.
One and a half years after the outbreak of the credit crisis, the old practices of the financial sector seem to have returned. National governments had to help out during the crisis with hundreds of billions of dollars to keep banks standing, but many banks started again with paying curiously high bonuses to their personnel. Reforms seemed to, under pressure by the sector, remain restricted to slightly tighter supervision and somewhat higher demands on the amount of money banks need to keep as a reserve. The flaws in the banking system that rewarded extremely risky behavior did not get acknowledged.
Obama now wants to create a separation between banks that manage savings and banks that unfold business activities with their own money. For tax payers, that is an important distinction. They need security for their savings, which banks manage—this became painfully clear during the credit crisis. Banks used savings to finance risky products with which they made high profits in good times. In bad times, with heavy losses, the tax payer had to suffer for it.
Because of the distinction, there will be banks that have government coverage, but are, therefore, not allowed to take risks, and banks that are allowed to take risks but can go fully bankrupt. Furthermore, banks are made smaller to decrease the impact of bank mismanagement on the economy.
Obama's proposition needs further detailing. As such, it is unclear which activities savings banks are allowed to undertake. Time will tell whether strongly supervised banking is profitable enough to keep the economy going. Also, it has not been determined if and how business banks can actually file for bankruptcy, and with that, severely damage the economy.
Obama's plan enables further discussion. Now that the most important financial player in the world, the U.S., really wants to draw lessons from the financial drama of 2008, other countries can no longer hide behind vague promises.
One and a half years after the outbreak of the credit crisis, the old practices of the financial sector seem to have returned. National governments had to help out during the crisis with hundreds of billions of dollars to keep banks standing, but many banks started again with paying curiously high bonuses to their personnel. Reforms seemed to, under pressure by the sector, remain restricted to slightly tighter supervision and somewhat higher demands on the amount of money banks need to keep as a reserve. The flaws in the banking system that rewarded extremely risky behavior did not get acknowledged.
Obama now wants to create a separation between banks that manage savings and banks that unfold business activities with their own money. For tax payers, that is an important distinction. They need security for their savings, which banks manage—this became painfully clear during the credit crisis. Banks used savings to finance risky products with which they made high profits in good times. In bad times, with heavy losses, the tax payer had to suffer for it.
Because of the distinction, there will be banks that have government coverage, but are, therefore, not allowed to take risks, and banks that are allowed to take risks but can go fully bankrupt. Furthermore, banks are made smaller to decrease the impact of bank mismanagement on the economy.
Obama's proposition needs further detailing. As such, it is unclear which activities savings banks are allowed to undertake. Time will tell whether strongly supervised banking is profitable enough to keep the economy going. Also, it has not been determined if and how business banks can actually file for bankruptcy, and with that, severely damage the economy.
Obama's plan enables further discussion. Now that the most important financial player in the world, the U.S., really wants to draw lessons from the financial drama of 2008, other countries can no longer hide behind vague promises.