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Haldane on the evolution of banking

Posted By Russ Roberts On October 25, 2011 @ 4:34 pm In Gambling with Other's $ | Comments Disabled

Andrew Haldane of the Bank of England (HT: Diane Coyle [1]) in a recent speech looks at [2] the increased leverage and the socialization of losses in the banking industry:

This century-long evolution in banking occurred for understandable reasons; it was no-one’s ‘fault’. But it has also unearthed a governance fault-line. Ownership and control rights are exercised by shareholders. But for banks, equity is a vanishingly small fraction of their balance sheet. Worse still, equity-holders often have risk-taking incentives out of line with the interests of other bank stakeholders, much less society. This fault-line lies at the heart of the imbalance between privatised returns and socialised risks. Only in banking do control rights and incentive wrongs combine so uncomfortably.

Confirms all my prejudices. They might actually be right.

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