Business Secretary Vince Cable is seen as a critic of the banks and has proposed stricter regulation and tighter capital requirements (meaning that they cannot lend so much relative to what they hold in assets). Two questions remain: will these restrictions go far enough to ensure banks that are stable and perform their central function of providing finance to the real economy; and will Cable be able to resist pressure from the banking lobby to water his proposals down? Many politicians have tried in the past and all have failed.

A green economist woulr argue for much stronger control over the process of banking by democratically elected politicians, who should retake control from the financial interests.Politicians should determine how much banks can lend relative to their assets and to work with other European politicians to take political control over capital movements from one country to another. Politicians should also feel empowered to intervene in the private credit market to limit the amount of borrowing by individuals and reduce the risk of people losing control of their debts. They could make it clear that there are teeth to our proposals by reasserting the government’s right to withdraw a banking licence from any institution that acts irresponsibly, as defined in the rest of the policy.

Cable’s proposal of separating retail banks (the ones where we have our accounts) from the investment banks who engage in high-risk, high-rewards trading are obviously sensible. The riskier banks should have the legal form of a partnership, so that the losses will be borne by the investors, rather than them being able to declare themselves bankrupt and avoid the losses associated with the risks they have taken. The intention of the following paragraph is to make clear divisions between different kinds of financial institutions, on the basis of how risky their dealings are.

The ‘too big to fail’ problem can be addressed by bringing in size limits much as we do in other economic sectors, such as those that face supermarkets if they seek to expand too much. It also requires banks to base their business on funds deposited rather than borrowing money from each other in the high-risk interbank lending market. These demands for prudent operation are the commitments the banks need to make in return for the political guarantee that the government makes to support citizens’ savings.

Instead of the bloated high-street banks green economists would support for the mutual banking sector, that is building societies and banks owned by their members without external shareholders. These institutions are subject to much stricter limits on the level of risk they can engage in. Government, both local and national, should set the tone, by investing its own money in such institutions, and should encourage others to follow suit. Since mutuals are also more restricted in terms of the lending they can undertake, this would also provide greater finance to local economies, in contrast to the fiasco of taxpayers money being lost in the collapse of the Icelandic banks

I have made a more radical suggestion about how we might rethink banks in a green society in an article I wrote for Red Pepper (pdf, 45 K). We should also remember the important role that credit unions play as alternative banks, and should make sure that our own money is all with the Co-operative Bank, its online version Smile, or with one of the mutual building societies.

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