Avoiding the next Global Financial Crisis


For years I have watched Senators in the United States Senate and members of Congress display extreme annoyance over the existence of laws designed to protect America from another financial meltdown. I have watched because both major parties are inherently linked to major bankers, that donate massive sums of money to their campaigns in the hope of getting a deal viewed as advantageous to them. But I have also watched because a combination of U.S. elections, the rise of populist agendas and an irrational contempt for regulation threaten to undo all of the good work protecting the American financial system from catastrophe.

This concern is based in large part on the news that President Donald Trump has instructed his administration to start work on overhauling the United States Federal Tax Code. The idea of overhauling the U.S. tax code is not new, and not necessarily a bad idea when one considers it is a cumbersome 4 million words long. But with this plan comes news that laws implemented to prevent another major financial crisis are also going to be potentially scrapped.

Following the 2008 Global Financial Crisis, President Barak Obama enacted what were known as the Dodd-Frank laws, which were specifically designed to avoid the monumental meltdown that saw American banking institutions such as Fanny Mae and Freddie Mac, Lehman Brothers and others go under. The changes enacted included regulation of banks, consolidation of agencies, retooling of the agencies to cope with future bankruptcies and improved accounting of credit agencies. Now all of this may be scrapped if Mr Trump succeeds in changing U.S. taxation laws.

Despite the pressures American banks may put on New Zealand, there is no reason on Earth why we should rush to follow suit. In New Zealand 31 individual banks collapsed between 2006-2010 wiping out several billion dollars worth of peoples savings. The hits suffered by individual New Zealanders ranged into the hundreds of thousands of dollars and individual bank collapses cost up to N.Z.$1.6 billion in the case of South Canterbury Finance.

Since then there has been some progress at ensuring that the New Zealand banking sector remains robust and trustworthy. One of the measures that has been introduced is the Open Bank Resolution Scheme. The purpose of this is to make easier the restart of a collapsed or otherwise imperiled bank by taking a percentage of investors savings so that the bank can reopen and enable investors to regain access to the rest of their money.

Whilst this is definitely a step in the right direction, it needs to be backed up by other measures. New Zealanders need to have confidence in the individual institutions and the ability of the law to deal with offenders.

I therefore propose:

  1.  Sentencing regime for punishing corporate and individual offenders be significantly overhauled Рheavier jail sentences for individuals and heavier fines for corporates
  2. Bankers have to be on a public register and their registration renewed every several years; be suspended if found committing an offence/be cancelled if found committing multiple offences or continuing to commit offences under banking legislation
  3. Agreements established with major international partners to extradite offenders wanted on charges of committing such crimes
  4. Publicize the Open Bank Resolution concept and implement in full

The idea is that a strengthened regulatory regime with appropriate punishments for non-compliance will act as a deterrence – banks might be viewed as too big to fail; individuals might be viewed as too big to jail, but would a significantly harder deterrence put them off doing anything untoward? Would banker prefer a 33 year prison sentence for the worst offending and/or a $2 million dollar fine and/or seizure of luxury assets such as private jets, helicopters, yachts, mansions and sports cars?

The major banks, plus their political allies National and A.C.T. will probably resist the urge to make necessary changes. However, they should do well to keep in mind the style of justice dished out to banks in Iceland when their economy was hit in 2008 by the G.F.C.: the courts jailed the bankers.

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