Shotgun Marriages Raise Risk of New Bank Blowups: Mark Gilbert

July 2 (Bloomberg) -- If the aftermath of the credit crunch is a financial landscape featuring fewer banks, each even bigger than before because of government-engineered mergers and opportunistic takeovers of weaker brethren, then we should all be very afraid. That, though, is exactly where we are headed.

Finance chiefs are bleating at the prospect of being hamstrung by new rules designed to impose some health-and-safety strictures on their behavior. Governments should ignore their self-serving objections, even if imposing safeguards makes it harder for investment banking to create new profit-producing techniques and securities.

The siren song sung by finance is easy to summarize. Regulate us too strictly, the bankers say, and global growth will suffer because of our inability to innovate. Never mind that it was precisely that unfettered, self-non-regulating approach to the securities industry that brought the economy crashing down. The banking community, far from finding a way to make amends for its profligate behavior, wants to convince us that “business as usual” is the only way forward.

Some of the language being used is unbelievable. “Overly complex, opaquely priced products got banks into trouble,” Standard Chartered Plc Chief Executive Officer Peter Sands said this week. “Overly complex, opaque regulations simply cannot be the answer.”

Sleight of Mouth

Did you see what he did there? By starting with an assertive statement about the origins of the credit crunch, and then mirroring that with a negative statement about what regulation is aiming to achieve, Sands managed to trash the notion that his industry needs more oversight. Such hubris screams of lessons going unlearned.

The bigger the bank, the louder the protestations. HSBC Holdings Plc Chairman Stephen Green said this week it is a “fantasy” to believe that smaller, “narrow” banks will provide better financial stability. “Customers, both businesses and individuals, need a wide range of services,” said Green, who runs Europe’s largest bank. “To force them to go to different types of institution for different services, according to some resurrected Glass-Steagall model, would be totally unrealistic.”

Errr, no. What is totally unrealistic is to continue with the broken model that allows bankers to gamble with depositors’ funds in whatever derivatives casino they fancy, safe in the knowledge that the taxpayer stands ready to bail out their misadventures without sanction or punishment.

Broken Steering

Rules must not become too tight, JPMorgan Chase & Co. CEO Jamie Dimon wrote in an article published by the Wall Street Journal last week. Financial institutions must be able “to steer capital toward the most promising innovations,” said Dimon, whose bonus depends on steering as much capital as he can muster toward the most lucrative -- or riskiest -- adventures he can get away with.

The only body that seems to be making sense on the future shape of finance is the Bank for International Settlements, the Basel, Switzerland-based institution that acts as a kind of central bank for central banks. The BIS’s opinions carry particular weight because of its track record as a fairly vocal Cassandra during the credit boom.

“Banks must resume lending, but they must also adjust by becoming smaller, simpler and safer,” the BIS said in its annual report this week. “Government rescue packages implemented so far appear to be hindering rather than aiding this needed adjustment. By helping banks obtain debt financing and capital, rescue packages allow managers to avoid the hard choices needed.”

‘Big and Complex’

Because holes in the banking system are stuffed full of our money, courtesy of the largess of our elected representatives, banks are able to ignore the need to reduce their balance sheets and stop owning risky assets. Moreover, the BIS says arranging shotgun marriages among failing institutions is “creating financial institutions so big and complex that even their own management may not understand their risk exposures.”

That’s a scary scenario, made even more frightening by the inability of regulators to face up to their responsibilities in helping to curb the excesses that plunged the world into crisis.

“We must be realistic about what intelligent cooperation can achieve,” U.K. Financial Services Authority Chairman Adair Turner said this week. “I do sometimes worry that there is a bit of a disconnect between grand political statements at G-20 or other meetings and what we are going to achieve.”

There’s nothing grand or political about wanting a safe and secure banking industry. There’s no disconnect between politicians demanding higher standards and ordinary folk expecting their deposits to be looked after and their taxes used for better things than bolstering banks. And there’s nothing clever about the Harry Houdini-style escapology that the finance industry is attempting as governments try to rein in the profligacy of recent years.