Thursday, January 21, 2010

Towards Classical Banking Reform

U.S. president Barack Obama will propose giving bank regulators the power to limit the size of the nation’s largest banks and the scope of their risk-taking activities, according to the New York Times .

“The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts – known as proprietary trading.” This is the approach long championed by Paul A. Volcker, and by Bank of England governor Mervyn King.

Indeed, it has become clear that the banking sector has been run as an oligopoly, which explains the extraordinary profits and bonuses of the last few years.

As the Financial Times editor Philip Stephens writes (January 18): “Institutions in the vanguard of spreading liberal market economics around the world were all the while making fortunes in markets that were rigged to their advantage.”

The U.S. proposal is a step in the right direction, that of more competition in the financial sector.

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