by Piet Coetzer

Banking crisis

Banks becoming threat to global economy

Barclays Bank

Taxpayers and the economy are not getting their money’s worth from government bailouts of banks that got themselves in trouble with dodgy loans and high-risk trade in so-called financial instruments. The conduct of some of the world’s largest banking institutions does not add up to much more than a complicated gambling game and they have become a major threat to the global economy.

Money is just not reaching the locations in the economy where real economic growth, value-anchored wealth and jobs are created. This situation brought Britain’s Business Secretary, Vince Cable, to the point where he recently accused banks of “throttling” economic recovery by failing to lend money to small businesses.

He described the banking culture as “anti-business” and echoed calls from Labour leader Ed Miliband for more competition in the sector.

“I want to see more competition,” Mr. Cable said on the BBC’s Andrew Marr Show.

“The banking culture is anti-business, it doesn’t focus on the long term. It is throttling the recovery of British industry because companies cannot get loans to expand their business.”

Mr. Cable said the shortage of credit for small business was the “real problem” in the economy, urging the British Government to press ahead with its £100 billion credit-boosting policies, including “funding for lending”.

The root cause

This situation can probably be ascribed to the fact that banks have been allowed to move from their traditional role of facilitators for the flow of money or capital from investors (deposit holders) to business entrepreneurs, who create new wealth and jobs, to being mainly investment houses.

In the process, banks have become traders in complicated financial “products” such as derivatives, not with wealth creation as the primary goal but rather the maximum (often speculative) profit in the shortest possible time.

This situation will most likely not be resolved until there is a complete divorce between retail and investment banking. What is probably needed is that the investment arms of banks should lose their banking licences and be called, treated and licensed for what they are -- investment houses or funds.

In the meantime Deutsche Bank became the latest to be dragged into the global Libor interest manipulation scandal, triggered by the recent £290 million fine imposed on Barclays. 

Problem spreading

Reuters reported last week that Deutsche Bank was also the subject of inquiries by the German financial markets regulator. These inquiries relate to periods between 2005 and 2011, indicating that the problem has been coming for some time and that regulators either failed to recognise it or to react to it in good time.

This prompted a member of the United States regulator, the Commodities Futures Trading Commission (CFTC), which first opened an investigation into Libor way back in May 2008, to say that the scandal should be a “swift kick in the pants” that forces an improvement in the global supervision of banks.

Regulators and governments across the globe have been slow to react to the changed financial environment triggered by the financial crisis of 2008. In the US, almost four years after the collapse of Lehman Brothers, regulators have still not finalised the rules to implement the Dodd-Frank Act, the financial reform act passed in the summer of 2010.

No modern economy can function properly without a strong and efficient banking sector. Some pockets still exist around the world, including South Africa. But as 2008 has proved, no-one is completely contagion-proof and the present ‘casino culture’, as some commentators call it, at some of the major banking institutions have become a major threat to the global economy.

Generally banks are facing the biggest credibility crisis in the history of that sector. This is graphically illustrated by an article last week by Robert Scheer for Information Clearing House in which he writes: “Modern international bankers form a class of thieves the likes of which the world has never before seen. Or, indeed, imagined....It reveals that behind the world’s financial edifice lies a reeking cesspool of unprecedented corruption. The modern-day robber barons pillage with a destructive abandon totally unfettered by law or conscience and on a scale that is almost impossible to comprehend.”

Under the circumstances the call by the official opposition, the Democratic Alliance (DA), on Finance Minister Pravin Gordhan last week to order a Reserve Bank investigation into the setting of the Johannesburg interbank agreed rate (Jibar) in order to reassure South Africans that no manipulation of rates is taking place, is quite appropriate.

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