Roy C. Smith and Ingo Walter suggest in Roubini Global Economics that big banks and financial conglomerates take initiative in coming to terms with the general public, their regulators, and their own investors, or be prepared to submit to a deluge of regulations “limiting risk-taking, increasing capital requirements, shrinking and breaking-up financial supermarkets, charging surviving banks for the failure of their cohorts, restricting compensation of senior managers and risk-taking bankers, providing consumer protection from incomprehensible and abusive products, regulating derivatives and hedge funds, and many more.”
The largest banks should voluntarily agree to abide by the principles proposed time and again by people like former US Federal Reserve Chairman Paul Volcker to remedy their main failings that led people to think bankers paid themselves too much and turbocharged their incentivized risk taking, regulators to conclude that bankers were too reckless in creating massive amounts of systemic risk exposure which would ultimately have to be borne by society at large, and investors to believe that bankers and their consultants have been flogging a broken business model – the financial conglomerate – far too long.
All of them are perfectly right, of course, and one wonders whether bankers will be able and wise enough to self-regulate this way ... Maybe so, if they consider that investors will pay higher prices for shares of more secure financial intermediaries, especially after a decade of focusing on increasing size, complexity and market share, - a strategy which resulted in much shareholder value being destroyed.
Strengthening a big banks cartel however entails many other risks and could prove to be a dubious recipe for taming bankers’ greed. A new banking law making the main elements of the Roy-Walter proposal compulsory would provide a safer and more efficient means for reforming the financial industry.
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