Recent News / Events
It's a 'double first' for Jo!
Thu 17 Jun, 2010
Jo Pinkard has achieved the remarkable feat of winning two prestigious national competitions organised by a leading investment bank. In September she was awarded a scholarship with Nomura Bank, which will enable her to pursue her interest in micro finance for developing countries. Jo will take up an internship with the Grameen Bank in Bangladesh next summer.
She has just discovered that she is also the winner of this year's Nomura Essay Prize, which bags her £500 and an invitation to London to receive it. Jo's essay on how to avoid another credit crisis impressed the the bank's distinguished panel of judges, although its prescriptions for reigning in excessive risk taking must have made painful reading for some of them. The news comes as a timely tonic for Jo, as she is in the middle of her A Level examinations. She has an offer to read Poltics, Philosophy and Economics at Oxford.
Here is Jo's winning essay:
‘If you were the Prime Minister, what would you do to avoid another credit crisis'?
The credit crunch refers to the financial crisis of 2008/9 which caused a severe reduction in the availability of loans. The problem originated in the collapse of the sub-prime mortgage market in the US. Banks had lent to high risk borrowers with poor credit histories, and when they defaulted, huge losses were incurred. As Prime Minister, I would tackle two key areas to avoid a repeat of the crisis; firstly the problem of excessive risk taking, but the ability of the financial sector to cope with a financial shock also needs to be addressed.
It is very easy to blame the ‘greed' of bankers for the crisis, but it was the system that encouraged their inordinate risk taking. The occurrence of asymmetric risk, with huge bonuses for success, but no consequences for failure, needs to be changed. Following the deregulation of the 1980s, there was a philosophy that regulation should be as light as possible. However, the assumption that the free market will always lead to the most efficient outcome clearly needs to be reviewed. A more heavy handed approach is needed in terms of overseeing strategies, products, appointments and remunerations. For example, legislating that a proportion of all bonuses has to be paid a couple of years in arrears would encourage bankers to take a longer term viewpoint.
There's also a strong case for reviewing the tripartite system of regulation. Currently, the FSA supervises individual banks, the Treasury is responsible for legislation and the Bank of England for financial stability, but the problem is that no one institution has overall authority. If the Bank of England had all three powers, the efficiency of the regulatory system may be improved.
However, taking risk will always be an aspect of banking. It is therefore essential that the industry can better deal with losses than it could in 2008. Keeping more capital in reserve would help banks weather poor market conditions, but it seems that a more radical change is needed. Banning retail banks from some of the riskiest operations, including involvement in hedge funds, private equity and investing their own money, so-called proprietary trading, would minimise the likelihood of the banks with the most direct impact on the consumer going bust. It would be smaller funds which would engage in the high risk activities. They would not be considered ‘too big to fail' and so would not be bailed out by the tax payer.
The overall aim of a strategy to avoid a repeat of the crisis has to be to ensure the best outcome for the economy. Regulation and reform can only be effective if there is a similar system used worldwide, otherwise banks will just relocate and in the process damage one of our key industries. A balance also has to be achieved between sufficient regulation and allowing the financial industry to perform its essential function in the economy. For a politician to use bankers as scapegoats so as to excessively tax and control the City will achieve nothing, except maybe a few votes.
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A