The FT has a new series on the future of investment. But what, I wonder, is the future of finance itself? Who is confident that the financial system now emerging from the crisis is safer, or better at servicing the public's needs, than the one that went into it? The answer has to be: few people. The question is how to remedy this dire situation.
What entered the crisis was, we now know, an ill-managed, irresponsible, highly concentrated and undercapitalised financial sector, riddled with conflicts of interest and benefiting from implicit state guarantees. What is emerging is a slightly better capitalised financial sector, but one even more concentrated and benefiting from explicit state guarantees. This is not progress: it has to mean still more and bigger crises in the years ahead.
My friend and colleague, John Kay, is aware of these dangers, as readers of his column know well. His answer, laid out in a pamphlet for the London-based Centre for the Study of Financial Innovation, is “narrow banking”*. Mr Kay rejects the notion that regulation can solve the problem created by state- guaranteed finance. Supervision, he notes, is always subject to regulatory capture. Moreover, banks “entered the crisis with capital generally in excess of regulatory requirements. These provisions proved not just inadequate but massively inadequate for the problems faced.” Worse, many of the dangers – notably the growth of off-balance-sheet finance – reflected attempts to circumvent regulation. Regulation, then, has not been the answer, but hitherto has been part of the problem.