The financial system must be regulated on terms set by citizens, not the financial lobby, argues Benoît Lallemand.
Benoît Lallemand is secretary general of Finance Watch, a European NGO focused on finance policy.
Today marks the fifteenth anniversary of the global financial crisis. On 15 September 2008, the financial world was left reeling when Lehman Brothers filed for bankruptcy. Institutions that citizens trusted to manage their money crumbled, only to be spared at the last possible moment by government bailouts.
Politicians scrambled, promising fundamental reforms of the finance rulebook. They committed to putting an end to reckless risk-taking and to making financial institutions serve the real economy. They pledged to make our financial system more stable and resilient. They said that public money would never again be used to save irresponsible banks.
But promises made to citizens have not been kept. Policymakers have tinkered around the edges, making small changes to regulation that do not go to the core of the problem but add thousands of pages of complex language to legislation that act as a smokescreen.
Today, institutions that are too-big-to-fail continue to operate in largely the same way as before the global financial crisis. They still enjoy implicit guarantees from governments and taxpayers.
The bailout of Credit Suisse earlier this year is a prime example. On 19 March 2023, the Swiss government bypassed parliament to secure the acquisition of Credit Suisse by UBS with CHF 109 billion in public money.
From a financial stability standpoint, it was the right thing to do. However, such action has an enormous societal cost, with citizens left footing the bill once again and the banking system operating with no distinction between banks that serve society and those that do not.
It doesn’t need to be this way. Rather than leaving central bankers to put out fires in the financial sector, policymakers have the power to prevent future crises from happening in the first place.
By introducing rules that make banks properly manage risk, adjusting capital requirements, bolstering supervision and making resolution regimes more reliable, they can ensure citizens don’t relive the pain of 2008.
The solutions are clear. So why aren’t policymakers jumping at the chance to make the financial system serve society?
This is where the financial lobby comes in. This well-resourced machine has scared many rule makers into thinking that any fundamental changes will have unintended consequences, that growth will be threatened and that the economy will suffer. They have taken the complexity of financial jargon and weaponised it for their own gain.
Take the ongoing debate on bank capital requirements at EU level. The financial lobby has successfully painted capital requirements as the “setting aside” or “holding” of money that could otherwise be lent out to support business and innovation. If policymakers raise capital requirements, they warn that the fallout will be calamitous.
This couldn’t be further from the truth. Research by the Basel Committee for Banking Supervision (BCBS) has in fact shown that banks with more robust capital ratios were more reliable lenders, better able to increase their lending, and less likely to damage communities by going bust.
Unfortunately, the truth about capital requirements – and many other much-needed changes to financial regulation – is too often ignored. Indeed, we seem to have reached a point where even ensuring finance does not harm society is too much to ask of some elected officials.
This is particularly clear when conversation turns to holding the financial sector accountable for the role it needs to play to accelerate the sustainable transition rather than adding literal fossil fuel to the fire.
But while I may get frustrated from time to time by the slow pace of progress, I’m not willing to give up just yet.
When Finance Watch was founded back in 2011, the effects of the global financial crisis were still being felt across Europe and beyond. Overwhelming public demand for change echoed into the offices of policymakers and ambition was high.
This resulted in a bold financial reform agenda. Public demand for change brought politicians to the drawing board back then, and it can do so again now.
Ahead of the 2024 European Parliament election, it’s time to inject that energy and hope back into financial policy discussions. It’s time to reset finance and regulate for a financial system that serves people and the planet.
Over the past fifteen years, the financial system has been regulated on terms set by the financial industry. Going forward, it must be regulated on terms set by citizens.
