The international banking crisis - a simple remedy for the future
Created | Updated Jul 12, 2009
The international banking crisis could have been avoided, if bankers and regulators had long ago used a little foresight and common sense. Similar crises of the future could be avoided by introducing a new regulation:
It should be enshrined as part of international law, that all banks must transfer a fraction of their annual profits to a special international fund, used only for the purpose of insuring against bank failure. The fund might be established under the auspices of the World Bank.
If a bank was failing, like Northern Rock in the UK, it would be allowed to fail - just like any other privately owned, failing business; however, depositors would get all their money back from the insurance fund. Hence, the taxpayer/government would never be called upon to bail-out failed banks. Those who run the banks must be aware that it is possible to fail, with no prospect of salvation from the taxpayer; otherwise, they will be in a position to hold the taxpayer and government to ransom time and again - a situation which engenders serious "moral hazard".
At times when a bank does not make profit, it would pay nothing into the fund. This means that the largest and most profitable banks would tend to subsidise the smaller and less profitable ones - much as affluent owners of large, expensive cars tend to subside the insurance of smaller, cheaper cars.
It should be enshrined as part of international law, that all banks must transfer a fraction of their annual profits to a special international fund, used only for the purpose of insuring against bank failure. The fund might be established under the auspices of the World Bank.
If a bank was failing, like Northern Rock in the UK, it would be allowed to fail - just like any other privately owned, failing business; however, depositors would get all their money back from the insurance fund. Hence, the taxpayer/government would never be called upon to bail-out failed banks. Those who run the banks must be aware that it is possible to fail, with no prospect of salvation from the taxpayer; otherwise, they will be in a position to hold the taxpayer and government to ransom time and again - a situation which engenders serious "moral hazard".
At times when a bank does not make profit, it would pay nothing into the fund. This means that the largest and most profitable banks would tend to subsidise the smaller and less profitable ones - much as affluent owners of large, expensive cars tend to subside the insurance of smaller, cheaper cars.
