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Banking reform : a disruptive policy framework for change

What combination of policies will be needed to create a banking system that better serves the public interest

Chris Hewett

on 13 September 2012

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Transcript of Banking reform : a disruptive policy framework for change

Finance Policies Why?
What are the most promising policy ideas that could disrupt the existing finance system in a way to overcome some of the biggest barriers to a sustainable economy? Through interviews and literature review we have undertaken a mapping exercise of the disruptive policy thinking that is already underway to create a sustainable finance system.

This forms the foundation for the project, from which we will build greater awareness, collaboration and policy innovation. What are the most promising policy ideas that could play a positive disruptive influence towards creating one? Two major questions Identifying the biggest barriers to change What are the biggest barriers to a more sustainable financial system?

Do they fall into clusters?

Are they amenable to policy intervention in order to be overcome? Phase I - mapping existing work The project has two starting assumptions:

the current financial system is not fit for purpose to deliver a sustainable economy

it requires some fundamental change to create an economy that protects the environment and supports the needs of society and business. What? What are the biggest barriers to creating a more sustainable financial system? and Explore and encourage the generation of policy proposals that can address the barriers identified.

Focus on disruptive policies that have the potential to transform the way the finance system interacts with investment in the real economy and create greater benefit for society and the environment.

As well as exploring the ideas themselves, help create the political space for their discussion, development and ultimately increase the political will for their implemention. Looking for innovative and disruptive policy solutions Types of disruptive policies Short termism in capital markets

Principal/agent problems

Environmental & social risks and benefits not measured or valued in the markets

Financial markets have become too complex High-level barriers Quarterly performance benchmarks for fund managers linked to remuneration

Equity holdings periods becoming shorter

Impact of high frequency trading on volatility

Quick profits in banking made with excess leverage Short-termism in
capital markets Too many intermediaries leading to conflicts of interest in investment banks, ratings agencies and other financial players.

Fiduciary duty interpretation not in long term interests of asset owners, made worse by

More banking capital deployed in financial and property speculation than lending to productive business Principal-agent problems
in investment supply chain Value of ecosystem services not understood or monetised in the market

Short term profits up side of an unsustainable investment not outweighed by externality downside in the future

Policy uncertainty pushes up cost of capital for low carbon investments or any other new approach

Hard to match the socialised rewards (eg health benefits of reduced pollution), with the private risks (eg investment in clean vehicles) Environmental & social risks and benfits not valued in the market Regulators, investors and ratings agencies cannot calculate the risks being taken in certain securitisation products

Financial products too complex for consumers to exercise control over their own money

Lack of transparency and effective competition leading to market failure for users of financial services: savers and borrowers. Financial markets have become too complex Legend Project Mapping Version 2.0 Revision 13/03/2012 Intro www.TheFinanceLab.org Links For more information:

contact the Project Manager, Chris Hewett at chris.j.hewett@gmail.com
complete out online survey http://www.surveymonkey.com/s/TFBP7ZB Contact Disruptive
Finance Policies Promoting a Sustainable Economy The
Lab Promoting a Sustainable Economy The
Lab Mapping stages of development Top-down Mainstream Bottom-up Using policy to force change on the system, either through tax measures, regulation or mandating structural changes to private financial institutions. Examples might be the splitting of retail and investment banks or Financial Transaction Tax. Mainstream disruption, is seeking to achieve fundamental change in the finance system, but by engaging some parts of the mainstream finance community, and attempting to attract large scale investment into activities which have a demonstrable social or environmental benefit. Examples of this work are recent developments in public finance institutions issuing Climate Bonds, or the creation of a Green Investment Bank. Bottom-up disruption, describes the more entrepreneurial activity in finance and investment which is seeking to engage investors more directly in financial products which are more transparent and clearly linked to social or environmentally beneficial. The work of the ethical investment professionals, community renewable financing and peer to peer lending, all fall into this category Videos Phase 2 - workshop Phase 3 - collaboration & advocacy To explore and critically examine new and developing policy ideas that have featured in the mapping work.

To enable those working on disruptive finance policy ideas to share latest thinking, strengthen their networks, develop their ideas and find ways to communicate them to the wider policy making community.

To prioritise a small number of policy ideas on which the Finance Lab will focus its efforts. Bring together people and organisations who want to collaborate around the priority ideas identified in the workshop

Design some policy development, communication and advoacy activities in order to engage policymakers Policy Map Reform areas reform areas level of policy development policy approach To skip the presentation, please click the home icon on the right Building relationships a diverse group of thinkers and practitioners.

Encouraging and facilitating greater collaboration, across different stakeholder groups.

Generating shared learning about possible disruptive policy solutions to create a sustainable finance system. How? Who? Policy thinkers

Finance practitioners


Advocates Banking reform - a disruptive framework Sustainable
Banking System Credit Guidance Transparency conditions Split retail and
investment banks State
Investment Bank Proportionate regulation of alternative finance Active encouragement for new banks Create new ownership models for banks through RBS Competition Diversity Innovation Transparency More productive lending Long termism "Too big to fail" subsidy £100bn in 2009. High barriers to entry Only 20% of bank lending is to productive business
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