Banks and the Eurozone & International Economic Crisis

Bring Back Old Fashioned High Street Banking -  Why Should Ordinary Customers Funds or Sureties Be Exposed to Speculative  Markets and Trades?

With Moody's downgrading yesterday of 15 of the worlds biggest banks, thus making it more expensive for them to borrow, the banking world staggers on in an apparent downward slope which no one seems to know how to reverse.

I am not an economist.  Far from it.  However like most of us I am blessed with a certain amount of 'common sense'.  Also, having worked in the City as a commodity & financial futures broker/analyst and then as a Financial PR consultant  for well over 25 years, I have seen a number of economic cycles.  During that time I also witnessed the convergence of  various parts of the financial and business sectors. Stockbrokers and banks as well as so-called secondary and tertiary banks all wanted a piece of the commodity futures action when the stock market went into the doldrums.   Inflation was rampant and commodity trading was percieved to be the way to make money.  It wasn't just individuals that got the commodity futures fever but stockbrokers and banks as well.  Having got a taste for it Banks then looked for other opportunities outside their traditional areas of operation.  Trouble was 90% of senior management did not understand the mechanisms of these arcane arts. Consequently they had not a clue how to manage (control) the trading activities of the young traders who seemed to be able to produce huge amounts of money.  The demise of Barings Bank was a tragic consequence of that ignorance.

In the 1970s a young professor of economics named Rich Sandor designed the first financial futures product which was launched on the Chicago Board Of Trade futures market.   He also coined the word "Derivatives" .  The contract allowed the financial sector to hedge interest rates as it was based on securitising (bundling) numbers of mortgages on homes  - thus the "GinnieMae" and "FannyMae" contracts were born.  Given that these were underwritten by the US Government i.e. respectively Government and Federal backed mortgages they were a great way to manage fluctuating interest rate risk.  However the inventiveness and "Gordon Gekko" greed of the financial sector resulted in an ever growing mountain of several times rebundled derivatives of all sorts.  The eventual collapse of this inverted triangle of multi layered derivatives we now know to have triggered the current banking crisis in the US.   The  knock-on effect of which we are now all suffering from.

So we should ask the question? - Should high street banks be involved with the high risk business of trading high risk financial instruments just because they are there?  When Mr & Mrs Average put their money into a current or saving account forty years ago that generally meant that the bank was not exposing their money to the vagaries of market trading.  That was the business of the old "merchant banks" - and Barings became a victim of the markets.   It's recently been clearly demonstrated that even the largest banks e.g. in the US, can fail when they are over-exposed to market risk.  Now, several of the largest that have survived have just been stripped of their AAA credit ratings because of the consequences of that exposure.  There is also the element of an all too prevalent "Gordon Gekko" management mentality amongst banls on both sides of the Atlantic.

As I said I am not an economist but it seems to me that if the High Street banks were now to be restricted to their traditional role of lending to businesses and individuals (entrepreneurs and Joe Public) the economy might have a chance of mending itself.  SMEs (small and medium enterprises) are the usual regenerators of the economy.  At present, despite a Base Rate of 0.5% they are apparently being starved of funds because the banks are involved with other areas of high risk banking which require significant reserves.  That might make for great bonus opportunities for bank executives but it also begs the question, why should our banks' business and private customers be exposed to the risks involved with the trading of derivatives and other exotic financial instruments.  

There has been talk of ring-fencing high street banking from its more glamourous and risky trading side 'opportunities'.  Perhaps now is a good time to introduce it as part of the mix being proposed by those celestial financial bodies and Governments currently proposing solutions to the Eurozone crisis.