In its report, Too Important too Fail, published today, TSC chairman and Labour MP John McFall (pictured) says more radical reform is needed. He says: “History is littered with examples of financial boom and bust, from the tulip boom, to the South Sea Bubble, to the dot-com frenzy.
“The challenge is to make sure that the financial system itself is not, as it has been recently, a prime cause of such instability, and to ensure that, in so far as possible, financial institutions bear the consequences of their own actions.
“That will require radical action. Reform is particularly pressing for the UK, where the banking sector accounts for such a large share of the economy.”
The report claims successful reform would transfer risk away from Government and back into the banking sector and says that, if moral hazard is reduced, market participants will have an incentive to apply market disciplines.
The report adds that the redesign of the system should be for the long term. It says the UK must not replace irrational exuberance with equally irrational restrictions. It says that a regulatory framework is needed that “will not flex according to the moods of politicians, the markets or even regulators”.
McFall says: “There are trade-offs between the objectives of reform as the more consumers are protected, the more risks taxpayers may have to bear and the more banks have to pay for their capital, the higher the rates they will charge their customers.
“Policymakers will have to decide where the trade-offs should properly be made and how this should be explained to the public. Today’s report is based on evidence we took from a wide range of key international figures on this issue and was agreed unanimously. We hope it will feed into the long term policy debate we need.”