Mark Hannam
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Two Cheers for the Walking Wounded

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The Doubly-Excluded:
consumer credit regulation in the UK


Corporate Governance: origins and challenges

Proposals for a price cap on high cost short term credit

The Need for Roots?

Syria: the Economic Implications of the Civil War

In Praise of Non-Bank Finance

The Price of Money

Numbers 4 Good

Borrowing Freely

Sceptics Knock Success

Life, Liberty and Access to Credit

Osborne's Banking Reforms: A Hedge Too Far

Always Spend Wisely ....

A Truly Ethical Foreign Policy

Southern Africa: 2020 Vision

Mervyn Turns a Tidy Profit

Private Banking for the Poor

Teaching Jurisprudence in Namibia

George - Don't do that!

Do the Math

Two Cheers for the Walking Wounded

That's Fair Enough

What Crisis?

How to Stop the Next Bubble

Muhammad Yunus

Rethinking Risk

Some banks have come out of the financial crisis in better shape than others. We should encourage them rather than lump them together with the failures.

Public anger at the recent failings of many of our leading banks, while justified, is not a sound basis for future policy. The temptation facing policy makers - that of failing to distinguish between better capitalized, better managed banks and under-capitalized, poorly managed banks - should be avoided.

The period leading up to the financial crisis was characterized by an insufficient differentiation of risk in the financial markets. Across many asset classes risk premia were compressed to such an extent that the difference in price between low-risk and high-risk assets was insufficiently wide.

Prices are signals and in the past few years they have signalled incorrectly.

Public policy that treats all banks as if they were the same perpetuates the problem of erroneous signalling: JP Morgan does not have the same problems as Citibank; Barclays' prospects are not identical to those of RBS.

The stress tests in the U.S. - however crude and dubious in methodology - are likely to demonstrate this. We can and should distinguish between those banks that benefit from general government support for the financial system and those that require specific government intervention to remain solvent.

Last autumn, when Lehman Brothers collapsed, there were legitimate concerns that the entire financial system might disintegrate, causing sustained and substantial damage to the global economy. At that moment blanket government guarantees covering all market participants were welcome because they were necessary. That moment has now passed.

Today's problem is not contagion, but the shortage of beds available for restorative surgery. The public purse isn't bottomless. We cannot be sure there will be no further fatalities but we do know which banks are on the critical list and which are not.

It makes sense to clear the walking wounded out of the hospital, even though they are not yet fully recovered.

We should welcome Goldman Sachs' and JP Morgan's desire to pay back money to the TARP scheme, and Barclays' willingness to sell assets to improve its capital position without taking additional government funding.

These banks have some way to go before they make a complete recovery, but at least they are making progress.

Those banks that have survived the past two years with less damage than their peer group are those that are cleverer or luckier than the average. They should be allowed to take advantage of the opportunities that the economic situation offers. They are our best hope for a return to normal activity in the financial markets, which in turn will initiate the slow process of economic recovery.

The news that some banks were able to make substantial profits in the first quarter has provoked some predictable venting of spleens: Goldman Sachs dares to be successful again!

Last year's schadenfreude has metamorphosed into this year's ressentiment. Whether bankers are losing vast sums of money or making vast sums of money, there will always be people who love to hate them. To indulge such hatred, at the cost of a longer and deeper economic recession, is pure adolescent posturing.

The events of the past two years have demonstrated beyond doubt that all banks depend upon governments (and therefore taxpayers) as their ultimate guarantors. No bank can avoid the consequences of systemic risk so all banks should pay for protection against them.

In the future these premia are likely to be higher than in the past and should be calculated according to the level of risk posed to the public purse.

Increased revenue from bank licensing should be invested in the reform financial regulatory system, which has demonstrated itself to be inadequate for its task. There are plenty of failed banks still to sort out and the process of bank supervision requires substantial redesign.

We need better quality regulators; but we will probably end up just with a bigger quantity of them. One lesson from the financial crisis that governments appear unwilling to learn is that size gives no indication of ability.

The stronger banks want to avoid the full embrace of the state. They appear confident that they can survive better without it. Some of them will be profitable this year. This is one of the few pieces of good news to come out of the financial markets of late.

As the Romans used to say, pecunia non olet: money does not smell. So then, two cheers for the walking wounded!

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© Mark Hannam 2009

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