Behind the theatrics on Barclays, what needs to be done?

Predictably enough the Barclays Libor scandal is generating rampant theatrics amongst both journalists and politicians.  It is not easy to keep grip on what actually matters.  And yet this is vital when it comes to deciding what the next steps should be.

One piece of theatre is a sort of whodunnit, amongst Barclays senior managers, and government and regulatory officials.  How much did they know?  What did they authorise? One line of attack concentrates on Bob Diamond, the former Barclays Chief Executive, whose evasions at a parliamentary select committee yesterday created predictable anger.  The real point behind this is the question of how far up the chain of command should responsibility for unethical behaviour go?  Should bank chief executives be like Royal Navy captains, as John Kay suggested yesterday in the FT, and take full responsibility for everything that happens on their ship?

A further twist comes from the thought that there may have been an element of government connivance in the second phase of manipulation, as the financial crisis was in full swing.  The hope amongst government politicians is that something can be pinned on Labour figures such as Shadow Chancellor Ed Balls.  That looks a long shot.  Experienced political operators like Mr Balls don’t leave fingerprints, and there were legitimate reasons at the time for an interest in the behaviour of Libor.  But the Labour’s case wasn’t helped by a radio interview with Baroness Vadera, Gordon Brown’s economic adviser, yesterday lunchtime.  She was evasive, confusing the two very different phases of the scandal (i.e. the first phase of manipulation for to make trading profits, and the second of official manipulation for wider politcal purposes).  It gave the impression there was something to hide.  Other key Labour figures, such as Mr Balls and Lord Myners, the former City minister, are giving much more confident performances, though.

Centre stage for the theatrics today is the argument as to whether any enquiry should be a full judicial one, like the Leveson Inquiry into the press, which Labour are asking for, or the government’s preferred option of a quicker parliamentary one.  Both options have merit.  A judicial enquiry gives the whole thing an air of importance, and legal interrogators are much more effective than grandstanding politicians; it would keep the City types on the ropes for longer.  But lawyers are unlikely to contribute much of value to designing a solution.  A parliamentary enquiry would be a quicker way to actually change the law, as well as creating less complications for any parallel criminal investigations.  What is actually needed is an expert commission – but we’ve already had one of those, the Vickers Commission – which indeed pointed towards some of the solutions.

But what actually needs to be done?  In principle this isn’t difficult.  Investment banking activities do play a useful role in the modern economic system, and aggressive trading culture can help the process of what economists call “price discovery” – spotting and correcting where the prices of financial instruments don’t reflect the world’s realities.  Short-selling the shares of badly performing companies looks ugly, for example, but it does improve accountability.  But the usefulness of investment banking is distorted by two problems:

  1. Using other people’s money.  Where traders use borrowed money to trade with, which is the bulk of what they do, then they are not taking full responsibility for the rsiks they are taking, and the whole balance of incentives gets skewed.  Trading soon escalates to levels beyond the socially useful. The volume of borrowed money used has risen massively over the last couple of decades, and many traders probably don’t even understand the idea of using their own capital to bet with.
  2. Trading culture struggles to recognise ethical boundaries.  A disagreement over price is one thing, but manipulating systems designed help people is another.  Fiddling Libor (especially in the first phase of this scandal) was one such transgression, as are various scams to exploit the way mutual funds are priced.  The UK regulatory authorities can be too soft on this.

So in essence what needs to happen is this:

  • Isolate banks’ trading and derivative activities from ordinary economic deposit-taking and commercial lending, and attach separate regulatory regimes to each.
  • Clamp down hard on unethical behaviour – with chief executives and directors taking full responsibility for what happens in their organisations.  Ignorance should not be a defence – and if that means some organisations become impossible to manage, then they should be broken up.  Sanctions should hurt, and include the criminal law (though remember that its higher burden of proof can get in the way).
  • The money supply to investment banking operations needs to be choked off, so that only those that fully understand the risks are supplying it.  Isolation will help here, but may not be enough.

The principles are easy, but the details are all important.  The problems are global but it will be very hard for us in Britain.  The City is so important for our overall economy that we are easily scared away from being too tough.  But if the attraction of the City is that it is easier to do unethical business, then this is not a recipe for long-term success.  We can still have a thriving financial services industry with niche operations based on genuine knowledge and expertise of the real world, and the provision of solid, well designed infrastructure and systems.

Next steps?  I think an enquiry is a bit of a distraction, so the government’s option is probably better.  the government perhaps using this enquiry as cover, must go back to the Vickers proposals and implement them in full.  Going beyond Vickers to enforce the full separation of investment and commercial banking should be considered.  And as for culture change, that needs to happen at the regulators, including the Bank of England, as much as the banks themselves.  A change of senior personnel would help here.

Barclays scandal: culture isn’t the problem, it’s the money

City traders live in a world of their own.  After the news of Barclays Bank’s fine for falsifying LIBOR returns, its share price rose slightly.  The scandal had been rumbling on for months, and they were relieved that it had been resolved.  They had no idea about the approaching firestorm – which took a big toll on its price later that day.  Later an investor was reported by the BBC (who may have been quoting a newspaper) that all this mob rule had to end.  But as the hue and cry continues (this morning the Barclays chairman resigned), politicians and media commentators seem to be equally out of touch with what lies behind the scandal.  Unfortunately that may mean that nothing useful comes out of it.

The LIBOR issue itself is being blown out of all proportion.  That is understandable.  So much of the unethical practice in the industry go unpunished that when somebody gets caught a disproportionate response is quite rational.  That is the point that City insiders probably missed in their sanguine early reaction.  But most of the comment has focused on the idea that the industry culture is thoroughly cynical and corrupt, and it is this culture that is the main problem needs to change.  Criminal penalties are spoken of for unethical behaviour, and the familiar idea that the payment of big bonuses should be limited.  The Business Secretary Vince Cable has called for banks’ investors to rein the managements in.

That’s all very well as far as it goes.  The culture is awful.  We shouldn’t be too romantic about how things used to be, though.  In the old City it may have been the case that “my word is my bond”, but ripping off clients and living off fat commissions was rife.  One point frequently made is that traditional upright commercial banking culture, such as displayed by Barclays’s Quaker founders, has been corrupted as investment bankers have taken over.  This is also true, but that fusty, conservative, self-absorbed commercial banking culture had to change.  I well remember having lunch once at Barclays HQ in the 1980s: what a gloomy experience, for all the uprightness of those involved – there was no hope of us doing business with them because they would never be ready!  We must look deeper.

The problem is that it is far too easy for big banks to make lots of money without too much effort.  That is absolutely corrupting.  Bankers naturally think that this money is added value for the highly skilled work they do to ensure that money flows to and from the right parts of the real economy.  The rest of us are entitled to be sceptical.  The profits which happen most years are wiped out in the bad years, when shareholders and taxpayers pick up the tab.  The investment bankers have found a number of ways to make bets with other people’s money, take the benefits for themselves, and make sure somebody else picks up the tab if things go wrong.

But that’s not the only problem, here in the UK at least.  There is also lack of meaningful competition.  It is impossibly difficult to set up a new bank to compete with the existing oligopoly.  The remaining banks have been allowed to consolidate into a small number of behemoths.  The regulatory authorities, including the Treasury and the Bank of England, as well as the FSA, have been complicit in this.  They prefer a cosy club of large organisations with big compliance departments than the rough and tumble of competition that, for example, the Americans or Germans experience.

The aim of public policy should be to make banking less profitable, so that the banks can’t pay massive salaries and bonuses, and more competitive, so that customers benefit from real innovation.  This needs the British authorities to do three things in particular:

  1. Make it much more difficult and expensive for investment banking and financial trading operations to secure finance.  Separating investment banking from commercial banking, as recommended by the Vickers Commission, is a good first step, though may not go far enough.  Increased capital requirements, as now being imposed globally, is another.  Regulators need to be particularly hard on bigger institutions, and not let the idea that larger operations are more efficient take hold.
  2. It must be much easier to set up new banks, both in commercial banking and investment banking.  The issue isn’t the amount of regulatory capital required, but a host of other obstacles placed in the path of new banks.
  3. While regulation needs to lighten up on the creation of new banks, it needs to be tightened on the regulation of lending operations.  We should not allow runaway growth of credit, especially that linked to the purchase of purely financial investments, and, it has to be said, to real estate.

All easily said.  But the trouble is that it is quite painful.  Attacking bank profits will look like an attack on one of a limited number of industries where British based operations are internationally competitive.  Easing up on creating new banks means tolerating more banking failures and creating a more challenging environment for regulators.  Restricting credit means curtailing the British love affair with property ownership.

It is easier to bang on about culture and lock a few people up.  The one good thing about the crisis is that it helps keep the pressure up on the Vickers reforms.  But when the dust settles the usual City types will be having a quiet word with their counterparts in the Treasury, Bank of England and the Prime Minister’s office about not throwing the baby out with the bathwater.  The reforms will be quietly defanged.  Bankers will continue to lord up.  Taxpayers will continue to be exposed.  And the British public will continue to be let down by bankers and politicians alike.

Let’s hope that this does not come to pass.  Critics of the banking industry will need to keep the pressure up.

 

Taming the banks: two views from the FT

Oh the shame of the FT’s paywall!  Yesterday  the paper presented a wonderful view of the debate on the UK banking reforms proposed by the Vickers Commission with two opinion pieces under the title Taming the banks, long overdue or utter folly?  For the reforms was regular columnist John Kay.  Mr Kay (though I’m sure he’s not really a mere Mr) is one of my favourite FT columnists.   His articles do come out on his website in due course, but not this one yet, I’m afraid.  It is a very lucid article, pointing out the massive size of UK banks balance sheets: at £6 trillion, four times the size of the country’s income.  Of these but a tiny fraction is lending to industry, and a rather larger fraction is domestic lending such as mortgages.  The bulk of it is to the finance industry pumping up the great game of leverage.  The idea of ringfencing, the critical part of the proposed reforms, is to stop the small fraction of balance sheets that matters to individuals and “real” businesses from being poisoned by financial engineering gone wrong; or to put it another way, to stop the British state from having to underwrite the latter to protect the former.  Mr Kay’s only criticism is that the reforms are being implemented too slowly.

The opposing article is from Sir Martin Jacomb.  Sir Martin is no more a banker than Mr Kay, that is to say he’s done non-executive directorships but not much more; he’s a lawyer and chiefly famous for saying that universities should be independent of government, and that Oxford University should cut its ties with the state.  The bankers are in fact rather quiet on the reforms, after some rather clumsy lobbying to get the implementation delayed, which appears to have been quite successful.  The weakness of their case seems reinforced by Sir Martin’s article, which nearly nonsense.  Is this really the best the FT could find?

Sir Martin reiterates a familiar litany:

  • The reforms advocate breaking up “universal banks”, but this model “can be perfectly safe”.
  • It will hurt the City’s international position. “There must be universal bankers in Frankfurt rubbing their hands.”
  • It will cause the loss of jobs and taxes.
  • the new banks will not able to offer helpful products to industry.
  • It does not address the immediate problems besetting European banking,  “which result not from mistakes by bankers so much as blunders by European Union governments in the management of the euro.”

This lot is readily disposed of:

  • Universal banks did not come out the recent crisis well.  It is true that some of the better managed ones did not need direct government rescue (Barclays and HSBC in the UK, BNP Paribas, JP Morgan), though still benefited from implicit and explicit guarantees.  But far too many did, especially in America (notably Citigroup and Bank of America), here (Natwest and HBOS) and Switzerland (both UBS and SBC).
  • This is yet another cry of “Wolf!” from the City.  I remember how us not joining the Euro was supposed to kill the City in favour of Frankfurt.  The City’s standing is based on network effects of people, skills and time zones.  Most of its activity is from foreign owned institutions already.  If the UK owned activity shrinks, it is because the public liabilities that go with it are too large.  It best that we adapt.
  • This sort of answers the jobs and taxes bit.  As Mr Kay points out, lending to job-creating non-financial businesses should not be affected, and might even benefit if they do not have to compete for attention with gearing up of financial products.  It is much healthier if our economy is less dependent on highly paid bankers’ jobs.
  • Sir Martin uses the example of a currency hedging, which might be useful for an exporter with a long term contract.  But surely his ordinary banker can introduce him to an investment banker at little extra cost?
  • This is true; it’s a separate issue.  But is quite astonishing for him to suggest that the Euro area problems are the fault of politicians rather than bankers.  It was the bankers that bankrolled the Italian, Portuguese and Greek governments at absurdly cheap prices.  It was its banking industry that laid the Irish government low.  It was bankers from across the zone that pumped up the Spanish property bubble.   This kind of “it wasn’t us” defence from bankers simply shows how little they have learned from the disaster.

Apart this whingeing, Sir Martin makes a more subtle point.  We should be promoting more competent management amongst banks, and excessive regulation does the opposite.  Well, we must ask what caused the rampant incompetence in the most of the world’s banks before the crisis.  Surely it was the thought that if things went bad governments would come to the rescue, and it would all then be somebody else’s problem?  This is exactly what the reform seeks to address.  By separating the investment banking side out, it means that failure from that side will be easier to tolerate, and should not require the UK tax payer to stump up.  The retail side would be bailed out in the event of a failure, true, but it will be more difficult for these banks to pump themselves up to create a massive hole.  

There is an irony behind all this.  The point about banking reform is to make banking more, not less risky, for bankers anyway.  We need to see more bank failures, not less.  The by-line to Sir Martin’s article is perhaps its most cogent bit:  “Beware the paradox that a system to limit risk invariably increases it”.  But risk to whom?

Vickers Commission: so far, so good

I have deliberately paused before commenting on the interim report of the Vickers Commission on UK banking reform.  I wanted to read more about it; it didn’t help that the post office delivered my Economist several days late.  Unfortunately I still have not had time to read the report itself; let me come clean on that.  Most of the commentary seems to be that the banks have largely got away with it, and are heaving a sign of relief.  My answer is “not necessarily”.  It may be clever politics not to go for the more totemic ideas, like a full split between retail and investment banking, since that clears the path for the reforms that really matter.

The report primarily concerns itself with two things: preventing a future UK government being forced into bailing out or underwriting banks, and increasing competition between the banks.  The latter was behind one of the more controversial recommendations: the breakup of Lloyds Bank.  But I don’t think that’s the main battle.  I despair about the lack of competition in UK retail banking, but I don’t see that the costs to the economy are that large.  The main game is preventing the next bailout.

The suggested strategy makes plenty of sense.  Ring-fence retail banks, force them to hold more capital, and leave investment banks to their own devices.  The significance of the second part of that proposition needs to sink in (as this article from John Gapper in the FT (£) makes plain).  An investment bank may be “too big to fail” in global terms, but the UK government will say is that this is somebody else’s problem, so long as our retail banks are protected.  This is an entirely realistic admission that the UK government is now just a bit part part player in the world of global banking.  If one our big investment banks fails, then we don’t mind if it is bought up by foreigners.  This is a striking contrast to the approach taken by the Swiss government.

But it leads to an obvious issue.  How do you prevent a meltdown in investment banking infecting the supposedly ring-fenced retail banks?  The collapse of Lehman’s in 2008 caused such chaos not because it was so big and important in its own right, but that it was too entangled with banks that had big retail deposit bases.  A retail bank will gather in lots of retail deposits; the question is where does all this money go?  If the bank is to make money it needs to get lent out.  If this lending gets into fancy investment banking products, then the ring-fencing has failed.  There must be some pretty heavy restrictions; the assets don’t need to be absolutely safe, but we want to insulate these banks from the complexities of the investment banking melee.  This will not be easy, as John Kay points out (in another FT paywall article, I’m afraid); all that is needed is an oversized treasury department, which is supposedly there just to oil the wheels of the machine.  Mr Kay knows this from bitter experience; he saw (as a non-exec director in the earlier days) how a runaway treasury department at the former building society The Halifax took that institution down a route that led first to demutualisation and eventually its own destruction; each step presented as innovative and sensible.  The detail must be subject to intense scrutiny.

But what of those excessive bankers’ bonuses and all the outrage that goes with them?  To the extent that this is a retail banking problem, the Vickers reform surely deals with it adequately.  The only way of tacking with it properly is to turn these banks into less profitable, lower risk utility organisations which can’t afford to pay big bonuses.  That is what ring-fencing and higher capital requirements should achieve.

But the bigger problem is investment banking.  This is an international issue, and Vickers is really about damage limitation.  As I have said before, the answer is not directly regulating remuneration, but cutting the profits.  This industry must be made much smaller and less profitable.  The two most important ways are through increased capital requirements and choking off its finance (or “leverage” as they like to call it).  The Basel committee is already making headway on the first.  Retail ring-fencing, if it is done properly, will help a lot with the latter.

Banking reform is a long hard road.  There is a danger that we have “wasted a good crisis”, and the passing of the crisis’s worst peak means that the pressure on politicians to deliver has eased.  But the crisis has not passed, though many financial types waving graphs seem to disagree.  A lot of banks are still in a shaky condition – and so are many governments’ finances, including those of the USA and UK.  There may well be a steady stream of aftershocks to remind our leaders that the journey is not over.  So far the Vickers Commission is playing its part.

Get ready for a big fight over bank reform

The recent shenanigans over the government deal with the banks (project Merlin) now make more sense, following Anthony Hilton’s revelation in the Evening Standard (reported here in Lib Dem Voice).  The deal was weak on the banks because the banks did not get what they really wanted – which was to emasculate the Independent Commission on Banking Reform.  George Osborne was quite happy to oblige, it is reported, but the members of the Commission threatened to resign en masse.  This means that if the Commission does propose anything radical, an important part of the government will be against it.  This will (or should) provoke a major national debate.  Time to start marshalling the arguments, and to be all them more ready for the flood of obfuscation and irrelevant arguments that is bound to surround such a debate.  Let me offer some thoughts.

Even in a quick and selective overview, I have shot over 1,500 words.  I offer this below, but for those without the patience to read through this, my conclusions are these:  it is necessary to restrict the activities of wholesale banking so that the returns it makes are substantially lower in ordinary years, and the losses they make in bad years are also much lower; it is also important to make the banks less interconnected.  International reforms on bank capital are already doing some good, but we should not be afraid to do more since we are particularly exposed to a future crisis here in Britain. When it comes to the important business of improving finance to support small and medium sized businesses and innovation, we will need new institutions – the big banks will be of little use; the state must promote this type of financial innovation.

One thing is for certain: the established banks will not like any effective reform.  If Mr Osborne is taking their side, we can expect a battle royal.  It will take both determination and guile to face them down.  I will be reflecting on the latter in future posts.

What’s the problem?  First, there are two clear and legitimate issues for state policy.  We want to avoid the risk of another expensive state bailout of the banking system like that which was forced on us in 2008-2009.  Second we want the banks to lend more, at better rates, to small and medium sized businesses with decent prospects, in order to promote job-creation and the improved efficiency of our economy.  A third issue is politically toxic, and drawing most of the attention – that a lot of bankers seem to be grossly overpaid, with bonuses drawing particular anger.  It is less clear whether this is a legitimate issue for government interference, but we need to understand the issues here nevertheless.

Time to clear the decks a bit so that we can concentrate on what’s really important.  Here are some red herrings, to switch metaphors:

  • Bank bonuses are often blamed for promoting the crisis, on the basis that they distort incentives and incite reckless behaviour.  But why aren’t shareholders, whose stakes are at risk, managing this?  In fact the shareholders were as much a part of the problem in the banking crisis as bonus-crazed staff.  It is the incentives for shareholders that need real attention; sort this out, and the shareholders will sort the staff out.
  • Bankers’ pay is not comparable to that of film stars, sports stars or other entertainers who attract massive rewards.  Entertainment stars are a retail phenomenon which, with modern communications, works on a winner-takes-all basis in a mass market.  This is different on two counts from banking: the mega-profits are on the wholesale side of the industry; and it isn’t winner takes all either – a huge number of individuals and firms are able to attract oversized pay, not a lucky few in sea of wannabes.
  • In fact the issue isn’t really banker’s pay, but why the banks can afford to pay them so much.  Investment banking is hugely profitable in the good years.  This high level of profitability is a sign of wasteful economics, not a reward for value added to society.  A properly functioning industry is not particularly profitable because competition reduces profits.  A company at the frontier of technical innovation can deliver big profits and still be economically worthwhile – but this is not what is going on here.  There has been a lot of innovation in the banking industry, but not much of it has been to the overall benefit of society.
  • For the British, a defining moment of the crisis was the fate of Northern Rock, which had to be bailed out.  The reason why a bailout was forced on the state was that retail deposit insurance arrangements were inadequate, which caused a run, and put too many individuals’ savings at risk.  This problem has largely been fixed, and what happened to Northern Rock is pretty much irrelevant to the ongoing debate – it is simply a source of obfuscating arguments.
  • It is the banks that are the real problem, and not other players like hedge funds and private equity.  These institutions may be responsible for some egregious behaviour, but they also address a big weakness in our system of finance: an excessive aversion to risk in most investment institutions. They are not systemically dangerous. To the extent that they are dangerous, it is because of the ease with which they can get finance from the investment banks and over-leverage…which brings the problem back to the banks.
  • Finally dodgy lending by banks was at the bottom f the crisis, but it is not the main problem that needs to be fixed.  The question is why did so many lenders felt able to suspend the laws of proper management and common sense, and how were they allowed to carry on doing so for so long?  The answer is because it was too easy for them to pass buck to somebody else, in the form of securities put together by the investment banks. Securitization was justified at the time as a method of spreading risk – but this proved a fallacy.

Now, the real issues.  The first is that wholesale banking (services delivered largely within the finance industry, and not to retail customers – mainly investment banking) is much too profitable for too much of the time.  Why? This deserves more analysis, but one problem is clear from the bailouts.  Banks are making bets that pay off well most of the time, but deliver occasional disaster.  If you add up the bets that pay off with the costs of the disasters, then profitability may not look excessive.  But when disaster strikes the downside for bank employees – and shareholders – is limited, and others have to come in to bail them out.  In fact many bankers seem to think of the disasters as acts of God that really shouldn’t be their problem.  This leads to the risks being systemically underpriced.  What to do?  The critical thing is to look at how the bets are financed, and to limit the amount that is done through borrowed money rather than the shareholders’ own capital.  When things go bad, it the money banks (and various intermediaries they do business through) borrowed from elsewhere and can’t repay that cause the systemic problems, not the loss of their own capital.

The second problem is contagion.  If one institution fails then it can bring down others with it, forcing the government to bail the firm out, and creating a wider moral hazard problem referred to as “too big to fail”.  The essential problem is that too many financial institutions are lending too much money to each other.  Retail bank customers can be dragged into this mix, which tends to force governments’ hands.  This is a tough one to tackle, but the key points are to reduce the amount of lending between financial institutions (as in the previous paragraph) and to make sure that banks with retail deposits don’t lend them to other financial institutions, or severely restrict such lending.  While trading in securities by investment banks rightly attracts attention, the lending of money to other financial institutions that is used directly or indirectly to buy securities is just as much a problem.

The third problem is the lack of interest by banks (shareholders as much as managers) in lending to smaller businesses.  The problem is that to be successful this type of business requires information and relationships, and this requires good quality human input.  And that’s expensive.  We see big banks polarising into two types of business: wholesale services within the finance industry or mass retail services using computer algorithms and call centres.  Not much space in the middle.  I don’t think our big UK banks will ever be good at this; it is just too late.  We need innovative new institutions.  Two avenues are worth investigating: trying to improve venture capital facilities, and setting up publicly sponsored and locally focused institutions to lend to businesses, perhaps drawing inspiration from the German and Swiss systems (see this interesting paper from Civitas).

Basically this boils down to two things: cramping the style and reducing the profitability of investment banking.  And encouraging innovation in the supply of finance to small and medium sized businesses.  Forcing the current banks to lend more to businesses will not help; they simply won’t understand what is needed.  Making the big banks separate investment and retail banking would probably be a helpful reform, but it is not necessary and would not be sufficient.  Barclays have managed to insulate their retail from their investment banking businesses quite successfully.  Retail banks become exposed by lending money to investment banks or to the shady investment vehicles they create without them being part of the same organisation.

Some progress has been made on restricting investment banks internationally.  New international rules on capital are already putting investment banking profits under pressure, although not yet to the extent that they are having to cut pay (see this article in The Economist).  Is this enough?  Britain is uniquely exposed to financial crises, and we were lucky not to go the way of Ireland and Iceland, with mass bank failures on our hands. We can’t expect much solidarity from our European friends, given how stingy we have been to them.  An oil crisis is in the works; property prices could yet fall further; monetary policy and fiscal bailout have run out of road.  We shouldn’t shy away from extra measures to reduce our exposure.

Forcing the banks to cut pay is going to be tough going – but it is only then that we will know that reform is working.  High pay is rooted into the culture of these organisations.  Probably some banks will have to fail first.  We must hope that this will be the orderly winding down of some units, but we can’t rule out something worse.  And that leads us to a key paradox that will be at the heart of the argument.  Measures to make banks behave more safely may well cause some systemic instability.  The idea isn’t to abolish financial earthquakes, but to make them smaller and less threatening – even at the price of having more of them.